Final Results
Aberforth Smaller Companies Trust plc
Audited Annual Results for the year to 31 December 2016
The following is an extract from the Company's Annual Report and Financial Statements for the year to 31 December 2016. The Annual Report is expected to be posted to shareholders on or before 1 February 2017. Members of the public may obtain copies from Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its website: 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.
FINANCIAL HIGHLIGHTS
| Net Asset Value Total Return | +5.8% |
| Numis Smaller Companies Index (Excl. Investment Companies) Total Return | +11.1% |
| Ordinary Share Price Total Return | -4.2% |
| Total Dividends increased to 30.10p per Ordinary Share (including a Special Dividend of 2.75p per Ordinary Share) |
The investment 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) (NSCI(XIC) or benchmark) over the long term. ASCoT is managed by Aberforth Partners LLP.
CHAIRMAN’S STATEMENT TO SHAREHOLDERS
Review of 2016 performance
Last year proved difficult for small UK quoted companies when compared with the returns of larger companies. The FTSE 100 Index gave a total return of 19.1%, while the return of the FTSE All-Share Index, which is heavily weighted towards large companies, was 16.8%. By comparison, the Numis Smaller Companies Index excluding Investment Companies (NSCI (XIC)), the Company’s benchmark, generated a return of 11.1%. The Company’s net asset value total return was 5.8%, while the widening of the discount from 4.9% to 14.2% led to a share price total return of -4.2%. The UK smaller company investment trust sector was negatively affected by the EU referendum as discounts widened to reflect the economic uncertainty stemming from the result.
The Managers’ Report expands in more detail on 2016’s performance and puts it into the longer term context of the three year continuation vote period.
Dividends
The positive dividend environment within the small UK quoted companies sector continues. In this context, the Board is pleased to propose a final ordinary dividend of 18.75p. This results in total ordinary dividends for the year of 27.35p, which represents an increase of 5.2% on 2015.
In 2016, the income account benefited from the receipt of five special dividends paid by investee companies. As was the case last year, the Board is proposing the payment of a special dividend of 2.75p per share (2015: 2.75p) in addition to the final ordinary dividend, thus ensuring the all-important retention test is passed to 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 52.3p per share (up from 45.1p as at 31 December 2015) and provide a degree of flexibility for the future. As in my statement last year, I would note that the base level for the Company’s progressive dividend policy in 2016 is 27.35p, i.e. excluding the special dividend.
Both dividends are subject to Shareholder approval at the 2017 Annual General Meeting and will be paid on 3 March 2017 to Shareholders on the register at the close of business on 10 February 2017. Their ex dividend date is 9 February 2017.
Continuation vote
It is the Company’s policy to hold a continuation vote every three years. The Annual General Meeting on 1 March 2017 will see the eighth such vote in its history and the first since I assumed the chair. The Board views the vote as a key shareholder right and we would encourage all Shareholders to exercise this right. The 2017 vote occurs against a backdrop where the returns from the Company have been below those of the NSCI (XIC) since the last vote. It is the role of the Board, in representing shareholders, to understand fully the factors that have affected performance over any given period. The current Board benefits to the extent that third party information has become more readily available, particularly when it comes to analysing the size and style influences that are at work in the UK smaller quoted sector. For the three year period to 31 December 2016, and indeed for much of the last decade, the value investing style has experienced consistent, and at times, severe headwinds, which have hampered the relative performance of the Company. The Board, in recommending a vote in favour for the continuation of the Company, is acknowledging the impact of the value investing style on the three year numbers but also its positive role in the creation of the excellent long term record. Given the longer term evidence, the Board continues to be encouraged by the Managers’ adherence to their value discipline, particularly over the past decade, which has been so hostile to this investment style. The Board, in monitoring performance, continues to believe that long term results give a much stronger indication of skill than short term figures.
Alongside the investment style analysis, which supports the Board’s recommendation to vote in favour, is the Board’s confidence in the Managers. This reflects their single asset focus, their commitment to restrict the business in terms of assets managed, the experience of the team and their significant stake in the Company. These factors, while by no means guaranteeing future outperformance, do, in the view of the Board, “tilt the scales†in the Company’s favour while avoiding at least some of the pitfalls that have hampered the broader fund industry.
Gearing
It has been the Company’s policy to use gearing in a tactical manner throughout its 26 year history. The existing £125m facility with The Royal Bank of Scotland has a term expiring in June 2017. 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, the Board and the Managers will seek to put in place a new facility which would continue to provide the 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 small UK quoted companies, having access to immediate funds through a credit facility provides the Managers with enhanced flexibility. At the year end, gearing stood at 2.7% of Shareholders’ funds. During the year, the level of gearing ranged from 0.3% to 4.2% with an average of 2.7%.
Share buy-in
At the Annual General Meeting in March 2016, the authority to buy in up to 14.99% of the Company’s Ordinary Shares was approved. During the year, 620,500 Ordinary Shares (0.7% of the issued share capital) were bought in at a total cost of £6.28m million. Consistent with the Board’s stated policy; those Ordinary 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 2017.
Outlook
2016 was a remarkable year as the UK voted to leave the EU and the United States embraced “populism†by electing Donald Trump. Undoubtedly, Brexit has introduced an additional level of uncertainty for British business, which I suspect will continue to be a feature for some time. Ironically, amidst all this apprehension, financial markets have started to move in a manner that should be more helpful for the Company. As the year drew to a close, value investing, as a style, performed strongly around the globe, though less pronounced in the UK small quoted arena where Brexit uncertainty looms large. Nevertheless, the Company’s stronger second half, with a net asset value total return of 19.2% compared to the 17.7% return generated by the NSCI (XIC), benefited from a slight style tailwind.
The interdependency of politics and economics currently appears elevated. 2017 will serve up further challenges and opportunities. By this time next year we may indeed have a little more clarity on Brexit, perhaps greater clarity on what President Trump’s America looks like and a series of elections will provide feedback on where European populism lies. In financial markets, the struggle between inflation and deflation and to what extent fiscal stimulus returns to the economic stage are likely to be important factors. The so called “reflation trade†could easily herald better times for the value investor, but stagflation against a backdrop of growing protectionism would undoubtedly be more challenging for equities in general.
However, with small UK quoted companies on their lowest rating since 2000 when compared with large companies and after a decade long bear market for the value style, it seems plausible that some of the headwinds of recent years could shift to become tailwinds for the Company over the coming years.
Finally, the Board welcomes the views of Shareholders and we are always available to talk to Shareholders directly. I have very much enjoyed and gained huge benefit from the conversations I have had with those Shareholders who have been in touch. My email address is noted below.
Paul Trickett
Chairman
27 January 2017
paul.trickett@aberforth.co.uk
MANAGERS’ REPORT
Introduction
ASCoT’s total return in the twelve months to 31 December 2016 was 5.8%. This was below the benchmark’s return, with the NSCI (XIC) up by 11.1%. Both ASCoT and small companies in general were some way behind large companies: the FTSE All-Share’s total return was 16.8%.
The year under review also marks the end of a continuation vote cycle. Over the three years, ASCoT’s total return was 15.8%, which may be compared with 20.6% for the NSCI (XIC) and with 19.3% for the FTSE All-Share. This represents a disappointing relative performance. The following paragraphs describe the general influences on ASCoT’s returns over the three years, summarise specific issues on an annual basis and look in greater depth at performance in 2016.
Performance review
Over the three year period, politics started to exercise greater influence on financial markets than has been the case for some time. From the Scottish independence referendum in 2014, through Brexit and the election of Donald Trump, political risk rose and remains elevated. The themes of populism, inequality and a challenge to the “liberal elite†are cited to link unexpected electoral developments around the world. Hand in hand with this come the threat of protectionism and challenges to the central bank orthodoxy of quantitative easing and ultra low interest rates. Over the course of the continuation vote cycle, the underlying problems facing the UK and global economies were unchanged – namely sluggish real growth, high indebtedness and deflation – but the means of addressing them might be on the point of transformation.
Inspired by Brexit and encouraged by both US presidential candidates promising greater fiscal stimulus, the financial markets were starting to toy with the possibility of a more inflationary turn of events in the middle of the year. It was, however, Trump’s victory that prompted a decisive re-evaluation of the outlook. Resources companies, whose share prices had begun a rebound in February following five years of extreme weakness, were given renewed impetus on the expectation of infrastructure investment. Meanwhile, the inflationary implications of populist policies drove bond yields sharply higher to challenge the consensus deflationary positioning that has held sway for much of the time since the financial crisis.
Against the background sketched in the preceding paragraphs, ASCoT’s investment returns varied widely year to year. The following summaries of individual years describe the principal influences on performance, starting with 2013, which, though not in the most recent continuation vote period, provides useful context.
2013 ASCoT +52.4% NSCI (XIC) +36.9% FTSE All-Share +20.8%
This was the year in which the financial markets last attempted to embrace the “great rotationâ€: still buoyed by Mario Draghi’s bravado in 2012, investors contemplated an acceleration in economic growth that would favour equities over bonds. Government bond yields thus rose sharply, which favoured the value investment style. ASCoT benefited accordingly.
2014 ASCoT -0.7% NSCI (XIC) -1.9% FTSE All-Share +1.2%
The optimism about economic progress of 2013 petered out, which was reflected in a relapse in government bond yields. This represented a complication for the performance of the value investment style. A good level of M&A activity protected ASCoT from the worst of a poor year for the asset class.
2015 ASCoT +10.2% NSCI (XIC) +10.6% FTSE All-Share +1.0%
This turned out to be a difficult twelve months for the value investor; indeed, within the context of the NSCI (XIC) it was the fourth worst year for the broad value style in sixty years. ASCoT managed to keep pace with the benchmark thanks to a further improvement in the incidence of M&A activity and to a relatively low exposure to resources companies, which continued to struggle in the face of high debt levels and falling commodity prices.
2016 ASCoT +5.8% NSCI (XIC) +11.1% FTSE All-Share +16.8%
As can be seen from the annual performance numbers above, ASCoT’s relative performance over the three year continuation vote period is down to what happened in 2016. An important influence on relative returns was the bounce in the resources sectors, which started in the middle of February and without which the NSCI (XIC) would have been up by 5% in 2016. This resources rebound played to the relative strengths of the FTSE All-Share against the NSCI (XIC), with large companies possessing a much greater exposure than small to resources companies. Similarly, ASCoT’s low exposure compared with the NSCI (XIC) hampered returns through 2016. That low exposure came through the miners rather than the oil companies. Indeed, the portfolio’s weighting in the latter was higher than that of the index and thus ASCoT benefited as the oil price’s recovery gathered pace. In total, the miners accounted for 316 of the 528 basis points under-performance in 2016 shown in the following table.
| For the 12 months ended 31 December 2016 | Basis points |
| Stock selection | (505) |
| Sector selection | 6 |
| ----- | |
| Attributable to the portfolio of investments, based on mid prices | (499) |
| (after transaction costs of 16 basis points) | |
| Movement in mid to bid price spread | 21 |
| Cash/gearing | 17 |
| Purchase of Ordinary Shares | 9 |
| Management fee | (70) |
| Other expenses | (6) |
| ----- | |
| Total attribution based on bid prices | (528) |
| ----- |
Note: 100 basis points = 1%. Total Attribution is the difference between the total return of the NAV and the
Benchmark Index (i.e. NAV = 5.80%; Benchmark Index = 11.08%; difference is -5.28% being -528 basis points).
For the avoidance of doubt, the Managers do not ignore the mining sectors: they are analysed in the same detail and depth as other parts of the stockmarket. However, the subset of miners available within the NSCI (XIC) has certain characteristics that complicate investment from the Managers’ perspective. First, the subset is highly indebted: a majority of the mining companies included in the NSCI (XIC) on its 1 January 2016 rebalancing had stretched balance sheets that threatened their survival and certainly prevented dividend payments. A second important factor is that many of the small miners remain controlled by oligarchs or family interests. This introduces an additional level of risk for minority shareholders and makes it difficult for the Managers to engage with the chairman in a useful fashion. In the rare cases where the Managers see these characteristics discounted by stockmarket valuations, they are willing to invest. Indeed, two of ASCoT’s biggest winners last year were miners.
Beyond resources, large companies also benefited relative to small from the effects of June’s EU referendum. The “out†vote was seen to be to the disadvantage of businesses addressing the domestic economy. The NSCI (XIC) has a greater exposure to such companies: roughly 59% of the accumulated historical sales of the index’s constituents were generated in the UK, which compares with approximately 25% for large companies. The portfolio’s exposure is around 53%. From this perspective, ASCoT was less affected than the benchmark by Brexit. However, the share prices of many domestic companies – notably retailers, property companies and housebuilders – were down over the year as a whole and therefore the referendum did affect ASCoT’s absolute returns.
A more significant influence on ASCoT’s relative performance was the Managers’ value investment style. Thanks to the powerful rebound of the resources sectors, the value style, as defined by the London Business School and Style Research, pulled ahead of the growth style in 2016. However, this was due to the out-performance of the resources companies. This underlying style performance was consistent with the downward pressure on bond yields over the twelve months. Since the financial crisis, the correlation between falling bond yields and weaker returns for the value investor has been high. One of the reasons for this is that lower yields tend to be associated with a poorer outlook for economic growth. This is to the disadvantage of value since in today’s market the typical value stock is cyclical, whereas bond-like equities, producing low but steady growth, have been re-rated to very high valuations that are more in keeping with those of traditional growth stocks. This state of affairs is unusual and, as described in the Conclusion of this report, gives the Managers cause for optimism: a move towards the inevitable normalisation of monetary conditions, such as was experienced in 2013 and has been seen since the US elections, would be to the benefit of the value investment style and by extension to ASCoT’s returns.
The portfolio
Though meaningful, top-down influences on performance are somewhat removed from the Managers’ day-to-day focus on stock selection. This is not to gloss over the impact of weak share performances that resulted from company specific issues: as is the case in any twelve month period, the portfolio contained several companies that did not perform as expected, both negatively and positively. However, the Managers’ preference not to focus in any one year on the attribution to ASCoT’s performance of individual companies reflects an important aspect of their investment approach.
The Managers attempt to divorce the name of a stock, with all its baggage and history, from the valuation accorded to it at any point in time by a capricious stockmarket. The failure of an underlying business to meet expectations is reflected in some measure by its share price almost instantaneously: what the Managers have to do is work out whether the disappointment is indicative of on-going pressures on the business that will result in a permanent loss of value or whether the stockmarket has over-reacted and is thus presenting an incremental investment opportunity. In the Managers’ experience the latter is often the case, particularly in the financial conditions of recent years when the “certainty†of returns from those bond-like equities have been so highly prized. Additionally, some of the best contributors to ASCoT’s performance over its history have been stocks where the Managers’ initial purchases proved poor but where the discipline has been exercised to reassess after a disappointment and then judiciously to invest incremental capital often over a period of years.
For ASCoT to generate superior returns for its shareholders, getting more investment decisions right than wrong on average year after year probably does the job. Following the reasoning of the previous paragraph, this aspiration, which may come across as deceptively unambitious, is not about identifying more high quality businesses than low quality businesses and owning them forever – that is an approach followed by the growth investor. Rather, the aspiration is about retesting the value of companies both within and outwith the portfolio in relation to the share prices accorded to them by a volatile stockmarket, and, from this, it is about encouraging the circulation of ASCoT’s capital over time from those stocks with low upsides to those with high upsides.
In 2016, the opportunities to put this process into practice were fewer than usual. This is reflected in an unusually low level of portfolio turnover. With situations, such as M&A, in which ASCoT is effectively a forced seller excluded, the underlying rate of turnover was just 12%, half the long term average. This reflected the mood of the stockmarket: general interest in the sort of stocks owned by ASCoT was low, which meant that they were not revalued and that there was little reason to exit existing positions. A similar phenomenon was witnessed in 2012: in the annual report for that year the Managers expressed a desire for “turnover to return to more normal levelsâ€. Given the unexpectedly sharp rebound in the following year, a re-run of 2013 would be welcome.
The Managers’ investment decisions resulted in a portfolio at 31 December 2016 with an active share of 76% assessed against the NSCI (XIC). Active share is a gauge of how different a portfolio is from an index. The higher the ratio, the higher the likelihood that the performance of the portfolio will differ, for better or worse, from that of the index. The Managers target a ratio of at least 70%, though would tolerate a temporarily depressed number. This target is assessed without the benefit of holdings that are not constituents of the index, since such holdings would flatter the ratio. The Managers believe that, with an active share of 76%, the portfolio is well placed to exploit a turn in the stockmarket back in favour of the value investment style.
In contrast to its lacklustre capital performance, the portfolio generated a good rate of income growth in 2016: 3.8% in headline terms. This number was affected by the receipt of several special dividends in 2016 and by an even larger contribution from special dividends in 2015. In underlying terms, with those lumpy special dividends excluded, the rate of increase rises to 12.5%. Adjusted for inflation this is far ahead of the 2.5% long term real dividend growth from small companies. These numbers highlight what was another good year for dividends from small companies in general. Encouraging boards to increase dividends are strong balance sheets: for illustration, companies with net cash on their balance sheets represent 29% of ASCoT’s portfolio. Another factor is relatively high dividend cover, which for the portfolio is 3x, well above the long term average of 2.6x. Additionally, trading conditions through 2016, while not buoyant, were sufficiently benign to allow small companies to move their profits ahead, notwithstanding the uncertainties engendered by the EU referendum and other big picture issues. Nevertheless, the above average pace of small company dividend growth enjoyed in recent years has to decline close to that long term average. The Valuations section below gives consideration to the risk of a downturn in the domestic economy, brought on by the uncertainties stemming from the EU referendum.
Valuations
The years since the financial crisis have seen valuation relationships develop within and between financial markets to levels that are unusual in a long term historical context. Most fundamentally, quantitative easing and zero interest rate policy resulted in the re-establishment of the “yield gapâ€: for the first sustained period of time since the 1950s, equities yield more than government bonds. Lower bond yields have been a handicap to the returns of the value investor, on the whole. The qualification is necessary since it is likely that ASCoT has enjoyed some mitigation by virtue of the above average yields of its typical holdings. Those yields became more sought after as bond yields declined and starved the investment world of income. This dynamic aside, the evolution of today’s valuation relationships has been a headwind to the Managers’ value investment style. More positively, a normalisation of the valuation stretches, which are illustrated below, will be of benefit to ASCoT’s future returns.
| Characteristics | 31 December 2016 | 31 December 2015 | ||
| ASCoT | NSCI (XIC) | ASCoT | NSCI (XIC) | |
| Number of companies | 87 | 349 | 86 | 349 |
| Weighted average market capitalisation | £617m | £800m | £567m | £750m |
| Price earnings ratio (historic) | 11.3x | 12.5x | 12.5x | 14.6x |
| Dividend yield (historic) | 3.0% | 2.8% | 3.1% | 2.7% |
| Dividend cover | 3.0x | 2.9x | 2.6x | 2.5x |
Small against large
The table shows the historical price earnings ratios of the portfolio and of small companies as a whole; consistent with the Managers’ value investment style, ASCoT’s PE is lower. Over the course of 2016, the PE of small companies has dropped from 14.6x to 12.5x. In contrast, the PE of the FTSE All-Share has risen from 16.6x to 18.6x. This leaves small companies on their widest PE discount to large since 2000. The re-rating of large companies reflects the substantial exposure of the FTSE All-Share to the resources sectors, which rebounded strongly in 2016, and to other international companies, which benefited from sterling weakness following the EU referendum.
“Small small†against “large smallâ€
| Market cap. range | Below £100m | £100m - £250m | £250m - £750m | Above £750m |
| ASCoT exposure | 4% | 17% | 45% | 34% |
| Tracked universe exposure | 1% | 7% | 34% | 58% |
| Tracked universe EV/EBITA | 9.4x | 9.6x | 11.6x | 12.2x |
The table shows that the UK stockmarket is presently characterised by a continuous size effect: the smaller the company, the lower the valuation within the tracked universe (representing 96% by value of the NSCI (XIC)). This is unusual in a longer term context: smaller companies have traditionally justified a higher valuation owing to their scope for superior, if more volatile, growth. Today’s state of affairs would appear to reflect elevated concern about illiquidity, which has been in evidence since the financial crisis. ASCoT, as a closed-end fund, is able to take a longer term view and to exploit the opportunity to own companies with better growth prospects on lower valuations.
Value against growth
| EV/EBITA | Growth | Other | Tracked | ASCoT |
| Number of stocks | 40 | 244 | 284 | 87 |
| 2017 on prevailing estimates | 16.4x | 11.0x | 11.7x | 10.1x |
| 2017 with a downturn | 18.6x | 13.0x | 13.7x | 11.9x |
The ratio of enterprise value to earnings before interest, tax and amortisation (EV/EBITA) is the Managers’ preferred valuation metric. The table shows the 2017 ratios for ASCoT, for the tracked universe and for two subdivisions of the tracked universe, i.e. 40 growth stocks and the 244 other companies. Two scenarios are set out for 2017. The first is based on prevailing estimates and reveals a wide gap between the valuation of the growth stocks and ASCoT’s portfolio, with the former on a 62% premium to the latter.
The second basis acknowledges the risks of a slowdown in the UK economy, as Brexit takes its toll on spending decisions and weak sterling affects purchasing power. For the sake of simplicity, the downturn is assumed to start on 1 January 2017. A second main assumption is that the downturn reduces the EBITA of companies reliant on the domestic economy by 25%, which is roughly in line with the experience in 2009. Under this scenario, and as should be expected, the profits of ASCoT’s portfolio companies decline by more than those of the growth stocks, the effect of which is to reduce the EV/EBITA premium of the growth stocks over the portfolio to 56%. While a recession in 2017 is by no means certain, the scenario analysis highlights an important facet of the UK stockmarket’s valuation at the current time. The out-performance and re-rating of growth stocks since the financial crisis have been justified by concern about the vulnerability of cyclical value stocks to another recession. However, growth stocks emerge from a recession model still on a large valuation premium. For the Managers – biased value investors that they are – this suggests that some of the risk of a downturn may already be captured by today’s share prices.
Conclusion
It is disappointing to have to report on a year of poor performance, which has also undermined returns over the three years of the continuation vote period. It is particularly frustrating that this comes against a background in 2016 that is ostensibly more favourable to the value investor. However, value’s nascent fightback was concentrated in the highly indebted mining companies, at least in the early stages of the year. Intriguingly, the year ended with a welcome broadening of the stockmarket’s appetite for value stocks. The catalyst would appear to have been Donald Trump’s victory in the US election. His rhetoric and, presumably, his policies may mark a turn from austerity towards a reflationary strategy. The promise of tax cuts, fiscal stimulus and protectionism have challenged the positioning of financial markets, which reflected an expectation of low rates, deflationary pressure and subdued growth. Government bond yields have responded: ten year yields in the US ended the year at 2.4%, up from a mid year trough of below 1.4%, while ten year gilt yields up from 0.5% in August to 1.2% at the year end. As talk builds again of the “great rotationâ€, small value stocks in the UK have been caught up in the repricing of a reflationary outcome and ASCoT duly benefited as 2016 drew to a close.
The power of the rotation so far probably says more about how extreme some of the valuation stretches within financial markets had become. For the rotation to continue the new president has to deliver on his promises, while other familiar macro economic issues, not least Brexit, need to be negotiated. However, the valuations of ASCoT’s holdings already reflect much of the top-down risk and the underlying characteristics of these companies offer encouragement. Though cyclical, they are well managed, robustly funded and resilient enough businesses to have weathered the financial crisis and severe recession eight years ago. Stockmarket investors in general may still be reluctant to embrace these qualities, but it was notable that the year ended with an upsurge in takeover activity: once again bigger companies are exploiting the valuation anomalies on offer among the lower reaches of the UK stockmarket, with overseas predators given additional encouragement by the weakness of sterling.
For the Managers, the weight of history together with the underlying progress of the businesses in the portfolio give confidence that today’s valuations are anomalies and that over time these will be addressed to the benefit of ASCoT and the value style more generally. Given how powerfully turns in financial markets can play out, the Managers believe that ASCoT’s contrarian positioning remains as compelling and as relevant as at any point in the trust’s twenty six year history.
Aberforth Partners LLP Managers
27 January 2017
DIRECTORS’ RESPONSIBILITY STATEMENT
Each of the Directors confirms 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;
(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 that it faces; and
(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 2017
PRINCIPAL RISKS AND RISK MANAGEMENT
The Board carefully considers risks faced by the Company and seeks to manage these risks through continual review, evaluation, mitigating controls 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 Company’s portfolio is exposed to share price movements due to the nature of its investment policy and strategy. 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 . 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.
(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 Board also closely monitors political developments and, in particular, is mindful of the uncertainty following the UK referendum result to leave the EU.
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 2016
(audited)
| For the year ended | For the year ended | |||||
| 31 December 2016 | 31 December 2015 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £ 000 | £ 000 | £ 000 | £ 000 | £ 000 | £ 000 | |
| Net gains on investments | - | 29,674 | 29,674 | - | 87,132 | 87,132 |
| Investment income | 39,027 | 5,229 | 44,256 | 37,652 | 1,462 | 39,114 |
| Other income | 46 | - | 46 | - | - | - |
| Investment management fee | (3,111) | (5,185) | (8,296) | (3,283) | (5,472) | (8,755) |
| Transaction costs | - | (1,925) | (1,925) | - | (3,890) | (3,890) |
| Other expenses | (689) | - | (689) | (778) | - | (778) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Net return before finance costs | 35,273 | 27,793 | 63,066 | 33,591 | 79,232 | 112,823 |
| and tax | ||||||
| Finance costs | (254) | (424) | (678) | (242) | (403) | (645) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Return on ordinary activities | 35,019 | 27,369 | 62,388 | 33,349 | 78,829 | 112,178 |
| before tax | ||||||
| Tax on ordinary activities | (36) | - | (36) | - | - | - |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Return attributable to | ||||||
| equity shareholders | 34,983 | 27,369 | 62,352 | 33,349 | 78,829 | 112,178 |
| ====== | ======= | ======= | ====== | ======= | ======= | |
| Returns per Ordinary Share | 36.93p | 28.89p | 65.82p | 35.03p | 82.80p | 117.83p |
The Board declared on 27 January 2017 a final dividend of 18.75p per Ordinary Share and a special dividend of 2.75p per Ordinary Share. The Board also declared on 27 July 2016 an interim dividend of 8.60p 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 2016
(audited)
| Capital | ||||||
| Share | redemption | Special | Capital | Revenue | ||
| Capital | reserve | reserve | reserve | reserve | Total | |
| £ 000 | £ 000 | £ 000 | £ 000 | £ 000 | £ 000 | |
| Balance as at 31 December 2015 | 950 | 38 | 172,625 | 955,881 | 62,385 | 1,191,879 |
| Return on ordinary activities after taxation | - | - | - | 27,369 | 34,983 | 62,352 |
| Equity dividends paid | - | - | - | - | (27,721) | (27,721) |
| Purchase of Ordinary Shares | (6) | 6 | (6,282) | - | - | (6,282) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Balance as at 31 December 2016 | 944 | 44 | 166,343 | 983,250 | 69,647 | 1,220,228 |
| ====== | ====== | ====== | ====== | ====== | ====== |
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 |
| ====== | ====== | ====== | ====== | ====== | ====== |
BALANCE SHEET
As at 31 December 2016
(audited)
| 31 December | 31 December | |
| 2016 | 2015 | |
| £ 000 | £ 000 | |
| Fixed assets | ||
| Investments at fair value through profit or loss | 1,253,247 | 1,195,581 |
| ---------- | ---------- | |
| Current assets | ||
| Debtors | 2,881 | 2,725 |
| Cash at bank | 241 | 1,025 |
| ---------- | ---------- | |
| 3,122 | 3,750 | |
| Creditors (amounts falling due within one year) | (36,141) | (510) |
| ---------- | ---------- | |
| Net current assets | (33,019) | 3,240 |
| ---------- | ---------- | |
| Total Assets less Current Liabilities | 1,220,228 | 1,198,821 |
| Creditors (amounts falling due after more than one year) | - | (6,942) |
| ---------- | ---------- | |
| Total Net Assets | 1,220,228 | 1,191,879 |
| ======= | ======= | |
| Capital and reserves: equity interests | ||
| Called up share capital | 944 | 950 |
| Capital redemption reserve | 44 | 38 |
| Special reserve | 166,343 | 172,625 |
| Capital reserve | 983,250 | 955,881 |
| Revenue reserve | 69,647 | 62,385 |
| ---------- | ---------- | |
| Total Shareholders’ Funds | 1,220,228 | 1,191,879 |
| ======= | ======= | |
| Net Asset Value per Ordinary Share | 1,292.57p | 1,254.30p |
CASH FLOW STATEMENT
For the year ended 31 December 2016
(audited)
| 31 December 2016 | 31 December 2015 | ||||||||
| £ 000 | £ 000 | ||||||||
| Operating activities | |||||||||
| Net revenue before finance costs and tax | 35,273 | 33,591 | |||||||
| Tax withheld from income | - | (59) | |||||||
| Tax recovered | 23 | - | |||||||
| Receipt of special dividends taken to capital | 5,229 | 1,462 | |||||||
| Investment management fee charged to capital | (5,185) | (5,472) | |||||||
| Increase in debtors | (215) | (432) | |||||||
| (Decrease)/increase in other creditors | (40) | 47 | |||||||
| -------- | -------- | ||||||||
| Net cash inflow from operating activities | 35,085 | 29,137 | |||||||
| ===== | ===== | ||||||||
| Investment activities | |||||||||
| Purchases of investments | (231,112) | (452,925) | |||||||
| Sales of investments | 201,136 | 480,102 | |||||||
| -------- | -------- | ||||||||
| Cash (outflow)/inflow from investment activities | (29,976) | 27,177 | |||||||
| ===== | ===== | ||||||||
| Financing activities | |||||||||
| Purchase of Ordinary Shares | (6,282) | (3,675) | |||||||
| Equity dividends paid | (27,721) | (23,964) | |||||||
| Interest and fees paid | (640) | (638) | |||||||
| Net drawdown/(repayment) of bank debt facilities (before any costs) |
28,750 | (27,250) | |||||||
| -------- | -------- | ||||||||
| Cash outflow from financing activities | (5,893) | (55,527) | |||||||
| ===== | ===== | ||||||||
| Change in cash during the period | (784) | 787 | |||||||
| ===== | ===== | ||||||||
| Cash at the start of the period | 1,025 | 238 | |||||||
| Cash at the end of the period | 241 | 1,025 | |||||||
| ====== | ====== | ||||||||
SUMMARY NOTES TO THE FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
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 Trusts (SORP) issued in 2014. The principal accounting policies have been consistently applied throughout the year and the preceding year. The financial statements have been prepared on a going concern basis under the historical cost convention, modified to include the revaluation of the Company’s investments as permitted by FRS 102. 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 2016 | 31 December 2015 | |
| £000 | £000 | |
| Amounts recognised as distributions to | ||
| equity holders in the period: | ||
| Final dividend of 17.85p for the year ended | 16,962 | 16,209 |
| 31 December 2015 (2014: 17.00p) | ||
| Special dividend of 2.75p for the year ended | 2,613 | - |
| 31 December 2015 (2014: nil) | ||
| Interim dividend of 8.60p for the year | 8,146 | 7,755 |
| ended 31 December 2016 (2015: 8.15p) | ||
| --------- | -------- | |
| 27,721 | 23,964 | |
| --------- | -------- |
The 2.75p special and 18.75p final dividend for the year ended 31 December 2016 will be paid, subject to shareholder approval, on 3 March 2017. 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 2016 | 31 December 2015 | |
| Returns attributable to Ordinary Shareholders | £ 62,352,000 | £112,178,000 |
| Weighted average number of shares in issue | ||
| during the year | 94,730,414 | 95,200,792 |
| Return per Ordinary Share | 65.82p | 117.83p |
There are no dilutive or potentially dilutive shares in issue.
4. INVESTMENTS AT FAIR VALUE
In accordance with FRS 102 fair value measurements have been classified using the fair value hierarchy:
Level 1 - using unadjusted quoted prices for identical instruments in an active market;
Level 2 - using inputs, other than quoted prices included within Level 1, that are directly or indirectly observable (based on market data); and
Level 3 - using inputs that are unobservable (for which market data is unavailable).
Investments held as fair value through profit or loss
As at 31 December 2016 |
Level 1 £’000 |
Level 2 £’000 |
Level 3 £’000 |
Total £’000 |
| Listed equities | 1,253,247 | - | - | 1,253,247 |
| Unlisted equities | - | - | - | - |
| ------------ | ------------ | ------------ | ------------ | |
| Total financial asset investments | 1,253,247 | - | - | 1,253,247 |
| ------------ | ------------ | ------------ | ------------ | |
| As at 31 December 2015 | Level 1 £’000 |
Level 2 £’000 |
Level 3 £’000 |
Total £’000 |
| Listed equities | 1,195,581 | - | - | 1,195,581 |
| Unlisted equities | - | - | - | - |
| ------------ | ------------ | ------------ | ------------ | |
| Total financial asset investments | 1,195,581 | - | - | 1,195,581 |
| ------------ | ------------ | ------------ | ------------ |
5. 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 | |
| 2016 | 2015 | |
| Net assets attributable | £1,220,228,000 | £1,191,879,000 |
| Ordinary Shares in issue at the end of the year | 94,403,292 | 95,023,792 |
| Net asset value attributable per Ordinary Share | 1,292.57p | 1,254.30p |
6. SHARE CAPITAL
During the year, the Company bought in and cancelled 620,500 shares (2015: 321,000) at a total cost of £6,282,000 (2015: £3,675,000). On 24 January 2017, the Company bought in and subsequently cancelled 25,000 shares at a cost of £279,000.
7. RELATED PARTY TRANSACTIONS
Directors’ fees and their shareholdings are detailed in the Directors’ Remuneration Report contained in the Annual Report. There were no matters requiring disclosure under s412 of the Companies Act 2006.
8. 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 2015, 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 2017. Members of the public may obtain copies from Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its website: www.aberforth.co.uk.
CONTACT: Alistair Whyte/Euan Macdonald, Aberforth Partners LLP, 0131 220 0733
Aberforth Partners LLP, Secretaries – 27 January 2017
ANNOUNCEMENT ENDS
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