Final Results

Aberforth Smaller Companies Trust plc
Audited Annual Results for the year to 31 December 2022

The following is an extract from the Company's Annual Report and Financial Statements for the year to 31 December 2022. The Annual Report is expected to be posted to shareholders by 6 February 2023.  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: https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

FINANCIAL HIGHLIGHTS

	1 Year to 31 December 2022	3 Years to 31 December 2022
Net Asset Value per Ordinary Share Total Return	-10.4%	0.5%
Numis Smaller Companies Index (excluding Investment Companies) Total Return	-17.9%	-4.2%
Ordinary Share Price Total Return	-7.3%	-6.8%

Total ordinary dividends for the year of 39.00p per share represents growth of 10.8% compared to last year’s 35.20p per share. In addition, a special dividend of 8.30p for the year (last year: nil) results in total dividends of 47.30p per share, an increase of 34.4% over last year.

INVESTMENT OBJECTIVE

The investment objective of Aberforth Smaller Companies Trust plc ("the Company" or "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.

CHAIRMAN’S STATEMENT TO SHAREHOLDERS

Review of performance

ASCoT’s net asset value total return in the twelve months to 31 December 2022 was -10.4%. In share price terms, the return was -7.3% as the discount narrowed from 12.6% to 9.8% over the course of the year. These asset and share price declines are clearly disappointing, but it is pleasing that ASCoT did succeed in mitigating the more significant weakness of small UK quoted companies in general. The Numis Smaller Companies Index (excluding Investment Companies) is ASCoT’s benchmark. Its total return in the year was -17.9%.

Declines of this sort were typical of financial assets around the world in 2022, with a notable exception being the FTSE All-Share, which was broadly unchanged. The prices of both equities and bonds struggled amid the first meaningful inflation in decades, as the world economy contorted to cope with the aftermath of the pandemic. Their credibility at stake, central banks responded belatedly with substantial increases in interest rates. Their task was complicated in the UK’s case by domestic political upheaval and more generally by Russia’s invasion of Ukraine in February. The continuing war exacerbates many of the supply chain issues and price pressures that stemmed from the pandemic.  The combination of higher energy prices and higher interest rates threatens recession in much of the world, particularly in the energy-importing economies of Europe.

Amid all these issues, it is easy to understand the weakness of small companies’ share prices in 2022. However, from here it is more important to assess to what degree the challenges are already reflected in valuations. This is explored by the Managers in detail in their report.

Dividends

One of the main themes of the Managers’ Report is the resilience of small UK quoted companies, which often seems to be under-estimated by the stockmarket.  Perhaps the clearest demonstration of this resilience is the dividend performance of the companies. This suffered in the pandemic, but the recovery has been remarkably strong, so much so that ASCoT’s Revenue Return per Ordinary Share in the year to 31 December 2022 rose to 55.64p, its highest ever. This was 51% above 2021’s level and 32% above 2019’s, the year before the pandemic. Six special dividends paid by investee companies in 2022 made a helpful contribution. However, even with these excluded, it was an exceptionally good outcome and one that contrasts with the exceptionally difficult experience in 2020.

In setting ASCoT’s dividend, the Board seeks to look beyond the portfolio’s income receipts in any one year with the ultimate aim of increasing the dividend at a rate above that of inflation. In this, we are guided by dividend forecasts provided by the Managers and can utilise revenue reserves, which are prudently replenished in the good years. It is clear that the ambition to grow ASCoT’s dividend in real terms represents a challenging hurdle at present, with December’s CPI rising by 10.5% year-on-year. However, the strength of the dividend experience over the past twelve months means that the Board can comfortably achieve its aim in respect of 2022.

Therefore, we are pleased to propose a final dividend of 26.95p per Ordinary Share, which is 11.1% higher than last year’s 24.25p. In combination with the 12.05p interim dividend, this would take the full year ordinary dividend to 39.00p, which would represent growth of 10.8%. In addition, we propose a special dividend of 8.30p, much of which would correspond to the special dividends received by ASCoT from investee companies during the year. The special dividend would also ensure that ASCoT passes HMRC’s all-important minimum retention test for investment companies.

As to the future, the Managers expect dividend growth from the portfolio in 2023, but the looming recession means that their estimates are likely to prove volatile. There are, though, offsetting considerations. First, the total dividend proposed for 2022 of 47.30p would allow ASCoT’s revenue reserves to be strengthened prudently from 59.0p to 69.9p per Ordinary Share. As it did during the pandemic, the Board is prepared to use these reserves to support an uncovered dividend. Second, the Managers’ data show that the balance sheets of the portfolio companies are unusually robust and should be able to mitigate the full impact of a recession on dividends. The Board is therefore optimistic that ASCoT can continue its record of real dividend growth, which has seen dividends compound at more than 7% per annum over 32 years.

Continuation vote

It is the Company’s policy to hold a continuation vote every three years. The Annual General Meeting on 2 March 2023 will include the tenth such vote in its history. The Board views the continuation vote as an important shareholder right and encourages all Shareholders to exercise it.

The period in respect of the tenth continuation vote was tumultuous, encompassing as it did the aftermath of Brexit, the pandemic, a war and a decisive departure from the extraordinarily accommodative monetary policies that followed the credit crunch in 2009. After a tricky start, ASCoT’s performance emerged consistent with its investment objective. The net asset value total return of 0.5% was 4.7% ahead of the NSCI (XIC)’s total return and, as described above, the Company’s dividend record has been sustained. While even three years is probably too short a period to judge an investment strategy, it is pleasing that the Managers’ commitment to the value investment style has benefited from the change in investment climate.  The value style has out-performed over the three years and ASCoT has benefited accordingly.

The Board believes that superior investment performance, over longer time periods, requires the consistent application of an investment philosophy and investment process. Part of its role, therefore, is to check that the Managers remain true to their principles, even in the most challenging circumstances.  In this last continuation vote period, it was encouraging to see the continuity of the Managers’ investment philosophy and conviction, as they deployed gearing to take advantage of distressed valuations during the pandemic and added to their own holdings in ASCoT’s shares. Their preparedness to stand apart from the crowd means that ASCoT benefits from a differentiated and relevant investment proposition. This does not guarantee superior performance every year, but it does improve the likelihood of success over time. The Board therefore recommends that Shareholders vote in favour of the Company’s continuation.

Gearing

The Board’s gearing policy has been consistent throughout ASCoT’s life. Gearing is deployed tactically with the aim of taking advantage of periods of stress in equity markets. This has led to ASCoT being geared on four occasions over its 32 years, with the most recent episode prompted by the pandemic in 2020, as noted above. Gearing has remained in place since then and, notwithstanding the setback to share prices in 2022, has enhanced ASCoT’s net asset value performance. At 31 December 2022, the gearing ratio, which is net debt to Shareholders’ Funds, was 5.7%.

The £130m debt facility to enable this is provided by The Royal Bank of Scotland International. Its term runs to June 2023, which is designed to align with the three yearly continuation vote cycle. After the Annual General Meeting, and providing the continuation vote is passed, the Board and the Managers will seek to put in place a new facility, which will continue to provide the Company with access to liquidity for investment purposes and for share buy-backs as and when appropriate. In an at times volatile and less liquid asset class such as small UK quoted companies, having access to immediate funds through a credit facility provides the Managers with valuable flexibility.

Share buy-back

The Company seeks authority to buy back up to 14.99% of its Ordinary Shares at the Annual General Meeting. The authority was renewed in March 2022. In the year to 31 December 2022, 2,603,661 shares were bought back and cancelled. The total value of these repurchases was £33.3m, on an average discount of 13.8%. In 2021, buy-backs totalled £12.9m at an average discount of 11.2%. The corresponding figures for 2020 were £6.1m and 13.8%.

The Board continues to believe that, at the margin, buy-backs provide an increase in liquidity for those Shareholders wishing to crystallise their investment and, at the same time, deliver an economic uplift for those Shareholders wishing to remain invested in the Company. Accordingly, the Board will be seeking to renew the buy-back authority at the Annual General Meeting on 2 March 2023.

Stewardship

The Board is responsible for the effective stewardship of the Company’s affairs and oversees the activities of the Managers in relation to Environmental, Social and Governance (ESG) matters. Pages 13 to 15 of the Annual Report cover the Board’s oversight and activities in 2022. They also set out the Managers’ ESG policies and practices, along with their voting approach and activity during the year. The Board endorses the Managers’ stewardship policy, which is set out in their submission as a signatory to the UK Stewardship Code. This, together with examples relating to voting and engagement with investee companies, can be found in the “About Aberforth” section of the Managers’ website at www.aberforth.co.uk.

Board changes

The Board regularly reviews its composition and structure in line with corporate governance requirements. As part of the Board’s succession planning, Julia Le Blan, who has been a Director for nine years and Chair of the Audit Committee for five years, will not stand for re-election at the forthcoming Annual General Meeting.  Julia has made a significant contribution to the Board and we wish her well for the future.

As I indicated in my Interim Report, Patricia Dimond was appointed as a Director and member of the Audit Committee with effect from 3 March 2022. She will take over as Chair of the Audit Committee on 2 March 2023 following Julia’s retirement. The Board also announced the appointment of Jaz Bains as a Director from 10 October 2022. Jaz has worked in the energy sector for over 30 years. In 2013 he helped set up and launch The Renewables Infrastructure Group (TRIG), now a FTSE 250 listed investment company, and he is responsible for leading the Operations Manager function of TRIG. He is also the senior independent director of the Jupiter Green Investment Trust Plc. Jaz has attended board meetings since October and will become a member of the Audit Committee on 2 March 2023.

Annual General Meeting (“AGM”)

The AGM will be held at 14 Melville Street, Edinburgh EH3 7NS at 10.30 am on 2 March 2023. Details of the resolutions to be considered by Shareholders are set out in the Notice of the Meeting on page 62 of the Annual Report. Shareholders are encouraged to submit their vote by proxy in advance of the meeting in case restrictions apply and it is not possible for shareholders to attend in person. An update on performance and the portfolio will be available on the Managers' website following the meeting. In accordance with normal practice, the results of the AGM will be issued in a regulatory news announcement and also posted on the website.

Conclusion

Twelve months ago, I expressed optimism for a year of progress and positive returns. This proved misplaced with the onset of war in Ukraine, which exacerbated the inflationary pressures that were a legacy of the pandemic. Elevated energy prices and rising interest rates threaten recession, which is in all probability already under way in the UK. Recessions are unpleasant – companies’ profits and people’s livelihoods are squeezed. Financial accidents happen as those rising interest rates and falling profits expose leverage. In navigating a path through recession, experience and resilience are important. Through its regular engagement with the Managers, the Board is reassured that these are attributes both of the executive teams running ASCoT’s investee companies and of the Managers themselves. The strong balance sheets that characterise the portfolio do not ensure a painless experience over the coming year but they certainly do suggest that ASCoT’s holdings will be well placed to enjoy the recovery that will inevitably come.

In the meantime, we should not lose sight of a silver lining in the recessionary cloud. The concern about economic slowdown resulted in widespread share price weakness last year. This has brought more opportunities to the value investor. The enlarged opportunity set is evident in the rise in the number of NSCI (XIC) constituents following the index’s rebalancing on 1 January 2023. The Board has been concerned about the shrinkage of the investment universe in recent years and so this may represent a welcome, and hopefully sustainable, reversal.

When the recovery does come, history teaches that share prices will rebound long before profits – it is after all the role of markets to anticipate and discount. The Managers’ Report describes the portfolio’s low historical price earnings ratio and argues persuasively that much of the risk of recession is in the price. However, the timing of an inflection is more difficult since low historical valuations are a necessary condition of a pick-up in share prices, but they are not a sufficient condition. As the Managers suggest, that path through recession will have its twists and turns as companies report results and as markets react to the interplay of inflation and interest rates.

Looking beyond the near term, my fellow directors and I are optimistic about ASCoT’s prospects. Events of the past few years have demonstrated the relevance of the Company’s differentiated investment strategy. Recent M&A activity underlines the attractions of the sorts of companies selected by the Managers. Meanwhile, the market’s willingness to look beyond growth stocks improves the value investor’s odds of beating the benchmark index. Over time, it is realistic to assume that market sentiment will oscillate between growth and value. Given this, what matters in my experience is that investment managers remain consistent in terms of their process and style. When it comes to ASCoT’s Managers, this is something about which we as the Board and you as shareholders can be confident over the years to come.

Finally, my fellow Directors and I very much welcome the views of Shareholders and are available to talk to you directly. My email address is noted below.

Richard Davidson

Chairman

27 January 2023

[e-mail]

MANAGERS’ REPORT

Introduction

Since inception in 1990, ASCoT’s purpose has been to achieve a net asset value total return greater than that of the NSCI (XIC) over the long term.  To achieve this objective, the Managers have applied a consistent and differentiated investment strategy, which has three notable aspects.

• The investment process is focused on understanding companies within the NSCI (XIC). The Managers consider factors such as financial performance, competitive dynamics and capital allocation priorities, as well as relevant environmental and social matters. A crucial focus is governance, which involves regular meetings with company directors. The outcome of the process is the selection of stocks to own in the portfolio.
• Stock selection is guided by a value investment philosophy. The reason for this is that there is strong historical evidence that over time a value premium can be harvested within equity markets. In practice, the Managers seek companies whose share prices are trading at wide discounts to their true values. As the gap between the two narrows, positions are reduced, with the proceeds recycled into other companies with greater upside, a process that the Managers term the “value roll”.
• The team managing the portfolio is experienced and well-resourced. It is often the case that the team members have known the investee companies for longer than the directors running them. The Managers have always engaged actively but discreetly with boards, both as part of their research and to seek to effect change if necessary. Their ability to engage is improved by their willingness to take significant stakes in investee companies.

The consistent application of these features does not guarantee strong returns in each year. However, it does ensure that ASCoT benefits from a differentiated and relevant investment strategy and, as the table in the following section suggests, it has contributed to results that have met the investment objective over ASCoT’s history.

Performance

ASCoT’s net asset value fell by 10.4% in total return terms in 2022. This was well ahead of the benchmark, with the NSCI (XIC)’s total return being -17.9%. In what was a year of poor equity returns around the world, larger UK companies distinguished themselves with a modestly positive return, as the FTSE All-Share benefited from its high exposure to energy companies.

Total returns	2020	2021	2022	3 years	CAGR since ASCoT’s inception
ASCoT NAV	-15.4%	+32.5%	-10.4%	+0.5%	+11.9%
NSCI (XIC)	-4.3%	+21.9%	-17.9%	-4.2%	+9.6%
FTSE All-Share	-9.8%	+18.3%	+0.3%	+7.1%	+8.1%
MSCI World (£ terms)	+13.2%	+23.4%	-7.9%	+28.7%	+9.3%

The table above puts 2022’s returns in the context of the three year continuation vote period that ended on 31 December 2022. The negative return of the NSCI (XIC) is notable for being the first time that small companies have lost ground over one of ASCoT’s continuation vote periods. ASCoT itself recorded a positive return and thus pulled ahead of the benchmark despite a difficult start to the three years. The table also brings in a gauge of international equity returns, which illustrates the opportunity cost of exposure to the UK in recent years and hints at the present cheapness of UK equities. However, given the turbulence of world events over the period, it is perhaps surprising that equity returns were on the whole positive. Indeed, greater stress is evident among government bonds, with the ten year gilts yield rising from 0.8% to 3.7% over the three years to produce a large negative total return.

The continuation vote period started with the pandemic. This remains a threat to public health in parts of the world, most notably China, but it is the virus’s indirect effects, principally through the measures taken to control its spread, that are now having the more meaningful impact. Huge fiscal and monetary stimulus, together with stresses in globalised supply chains, sowed the seeds of the first meaningful inflationary episode for decades. Pressure has been intensified by the war in Ukraine, which has raised energy prices and further complicated supply chains. Central banks have responded by raising interest rates to take monetary conditions decisively away from the zero interest rate policies that have held sway since the global financial crisis. However, higher interest rates have further increased the cost of living to threaten a slowdown in economic growth. This looming recession has contributed to the weakness in share prices around the world in 2022.

On top of these global issues, investors in UK assets have had to contend with a fraught domestic political situation.  The scarcely believable events of the third quarter of 2022 contrast with the widespread optimism in the wake of the decisive general election result at the end of 2019. The divisiveness of Brexit and an increasingly factionalised Conservative party contributed to Liz Truss’s elevation to Prime Minister and to a mini budget that saw global financial markets lose confidence in the UK. Sterling took the strain, which is an advantage of a freely floating currency, but the more meaningful pain was experienced in sharply higher borrowing costs for the government and the private sector. Among equities, the aversion to all things British saw outflows from open-ended funds and institutional allocations to UK equities approach twenty year lows. The swift change of Prime Minister has restored confidence, bringing a rally in sterling and gilts, but UK equity valuations continue to trade at wide discounts to their global peers.

The main influences on performance in 2022

The table below sets out the contribution of various factors to ASCoT’s relative return in 2022. The following paragraphs add context and explanation, mainly to the first row in the table, which quantifies the performance of the portfolio and is usually the most meaningful effect on ASCoT’s overall returns.

For the twelve months ended 31 December 2022		Basis points
Attributable to the portfolio of investments, based on mid prices  (after transaction costs of 14 basis points)		850
Movement in mid to bid price spread		(7)
Cash/gearing		(64)
Purchase of ordinary shares		36
Management fee		(64)
Other expenses		(5)
Total attribution based on bid prices		746
Note: 100 basis points = 1%.  Total Attribution is the difference between the total return of the NAV and the Benchmark Index (i.e. NAV = -10.41%; Benchmark Index = -17.87%; difference is 7.46% being 746 basis points).

Value Style

The value investment style helped performance in 2022. It has, however, been out of favour for most of the period since the global financial crisis 14 years ago. An important influence on this has been the monetary conditions that were a response to the credit crunch. Low to zero interest rates and quantitative easing contributed to lengthened investment horizons and unusually low discount rates used to value assets. The beneficiaries in the equity world were companies whose cash flows were more weighted to future years, many of which are currently loss-making. These long duration equities are growth stocks, which enjoyed substantial revaluations over the past decade or so and a period of particularly sharp out-performance amid the pandemic.

The Managers have regularly hypothesised that an increase in bond yields and, by extension, in discount rates would expose these high valuations and would lead to a period of better relative performance from value stocks. This has come to pass, as inflationary pressures have returned, as interest rates have been increased in response and as bond yields have risen. The value style has therefore performed relatively well since the vaccine rally towards the end of 2020. This out-performance has been helped by disappointing results from many growth stocks – even some of the US technology giants have responded with cost cutting and redundancies.

Within the NSCI (XIC), investment style effects can be tracked through data from London Business School, which defines value stocks as those with low price-to-book ratios and growth stocks as those with high ratios. In 2022, the index’s value component out-performed the index as a whole by 9%. The Managers’ investment process takes into account a broader range of valuation metrics and qualitative considerations, but it is clear that the investment style environment was helpful to ASCoT’s relative returns.

Economic cyclicality

Concern about recession was an important reason for the negative return from the portfolio and, indeed, from the NSCI (XIC) in 2022. In contrast to weak share prices, the profit performance of ASCoT’s holdings in 2022 was generally good. In large part, this was due to the momentum with which they entered the year as the recovery from the pandemic continued to play out.

However, as the year wore on, several companies that are more exposed to the domestic economy started to report weaker trading, as the familiar cost of living issues started to affect sales and costs. Meanwhile, those businesses with a greater reliance on overseas markets proved more resilient. Their profits have been helped by the translation benefit of sterling’s decline and by a build-up of inventories to meet customer demand amid the supply-chain problems. Despite these diverging experiences at the underlying business level, there was little to choose between the share price performances of the domestics group and the overseas group in 2022. Entering 2023, 54% of the revenues of the portfolio holdings were generated in the UK economy, against 49% for the NSCI (XIC).

Since the global financial crisis, sensitivity to the economic cycle has been a trait generally shunned by stockmarkets. Consequently, the value cohort of the NSCI (XIC) has become increasingly populated by economically sensitive companies such as retailers, leisure businesses and engineers.  It is therefore likely that concerns about imminent recession would disproportionately affect a portfolio, such as ASCoT’s, selected under a value investment philosophy. This would have hampered ASCoT’s performance relative to the NSCI (XIC) in 2022, but there are mitigating factors. As noted above, growth stocks themselves are facing cyclical headwinds, while the balance sheets of ASCoT’s holdings are unusually robust at present, which is explored in more detail below.

Income

While the portfolio declined in capital terms in 2022, its income experience was very strong and supported ASCoT’s total return in the year. The table below splits the portfolio’s holdings into five categories, which are determined by each company’s most recent dividend action.

Nil Payer	Cutter	Unchanged Payer	Increased Payer	New/Returner
18	6	11	38	6

Starting with the Cutters, the reasons for the cuts over the past year were idiosyncratic rather than related to the more uncertain economic environment. Their impact was eclipsed by the Increased Payers and the New / Returners. The latter category comprises companies that are paying dividends for the first time or that have now resumed payments, having passed their dividends during the pandemic. This provided a large contribution to the income growth enjoyed by ASCoT in 2022. Another boost came from the receipt of six special dividends paid by investee companies in the year.

It is important not to extrapolate the rate of income growth in 2022 – after all nil payers can only resume dividend payments once and special dividends are by their nature unpredictable. Another consideration is that the Managers may identify more attractive investment opportunities among nil yielding companies. A higher exposure to these would, all else being equal, reduce ASCoT’s income. However, that is not the case today and the Managers presently anticipate a year of progress in 2023 in underlying terms (i.e. excluding special dividends).

The outcome for 2023 will inevitably be influenced by the course of the economy, though the portfolio’s strong balance sheets are helpful. Moreover, the average historical dividend cover of the portfolio at 31 December 2022 was 3.4x, which compares favourably with the long term average of 2.7x. Finally, the Managers expect that several more of the current Nil Payers will be able to resume dividend payments over the next year or so.

These considerations have informed the Board’s ambition to grow dividends paid by ASCoT in real terms and its decision to increase the final dividend by 11%.

Stock selection – boosted by M&A

Stock selection helped ASCoT’s performance in 2022 and within this M&A was the clearest theme. Six of the portfolio’s holdings received takeover bids during the year, with an average premium to the pre-announcement share price of almost 60%. The stimulus to performance of a takeover in a year of generally weak share prices is meaningful, but it remains important to guard against opportunism on the part of the buyers when valuations of small UK quoted companies are so low. Notwithstanding the sizeable takeover premiums, the Managers were disappointed with the terms of two of the deals, which they believed undervalued the companies concerned. It is often the case that the best M&A experiences are those in which boards of directors offer to consult shareholders well in advance. Such consultation reduces the risk of embarrassment, should shareholders find proposed terms unacceptable, and can lead to better outcomes, which may be that the company in question retains its independence. The Managers make it clear to the boards of the investee companies that they want to be consulted in such situations and that they are willing to be insiders for extended periods.

It was also a busy year for M&A within the NSCI (XIC). Takeover bids for 19 of its constituents were announced, some of which will not complete until 2023. The acquirers in 16 of these cases were overseas buyers, attracted no doubt by low stockmarket valuations and by sterling weakness. Towards the end of the year, the pace of deals eased. The UK’s political spasm in September may have been influential, but the more important reason was volatility within debt markets, which complicated the funding of deals. In this regard, it was notable that the acquirers in 14 of the NSCI (XIC)’s 19 deals in 2022 were other corporates rather than private equity.

Size

The portfolio retains its high exposure to the “smaller small” companies within the NSCI (XIC). The reason is rooted in relative valuations and is explained later in this report. Size positioning has often had a significant effect on performance. For most of the period since the global financial crisis, investors have favoured the greater liquidity of the “larger small” companies, which hindered the portfolio’s relative returns. However, the portfolio benefited from a resurgence of the “smaller smalls” in 2020 and 2021. In 2022, there was little to choose between the price performances of the two cohorts and so size positioning had a negligible effect on ASCoT’s performance.

Gearing

Amid the weakness of equities in 2022, ASCoT’s gearing hampered its performance, as the table at the beginning of this section quantifies. ASCoT’s gearing strategy is tactical – it borrows when valuations and share prices are unusually low. Gearing has been deployed four times in ASCoT’s history, the most recent opportunity coming in 2020 with the pandemic. Notwithstanding the vaccine rally, valuations did not recover to the levels that prevailed before the pandemic and so ASCoT was still geared as 2022 started. Through the year, the gearing ratio averaged 5%, its oscillations a function of stockmarket moves and of the timing of the realisation of positions in holdings subject to takeover. Since deployment in mid 2020,gearing has enhanced the performance of ASCoT’s portfolio. With valuations still attractive, it remains in place as 2023 begins.

Portfolio features

Active Share

Active share is a measure of how different a portfolio is from an index. The ratio is calculated as half of the sum of the absolute differences between each stock’s weighting in the index and its weighting in the portfolio. The higher a portfolio’s active share, the higher its chance of performing differently from the index, for better or worse. The Managers target an active share ratio of at least 70%. At 31 December 2022, it stood at 77%, which is up slightly from 76% at the end of 2021.

An influence on the rise of the active share was the annual rebalancing of the NSCI (XIC) on 1 January 2023. This is usually a low-key affair, in which companies too big for the index are ejected and those now small enough are included. Occasionally during periods of stockmarket stress, it is a bigger event, notably in 2009 amid the global financial crisis and now in 2023. This year’s rebalancing saw 29 companies, whose share prices had performed particularly poorly in 2022, brought into the index. These “fallen angels” accounted for 26% by value of the NSCI (XIC) on the 1 January 2023. They bring additional opportunity and, indeed, the Managers have so far added two of the new entrants to the portfolio. These two companies are former holdings, which the Managers know well but which had grown too large for the NSCI (XIC) in previous years. It remains to be seen whether this significant refreshing of the index represents a turn in the long term trend of decline in the number of NSCI (XIC) constituents.

Portfolio turnover

Portfolio turnover is defined as the lower of purchases and sales divided by average portfolio value. Over the twelve months to 31 December 2022, turnover was 18%, which is just over half the average in ASCoT’s 32 year history. The relatively low rate of turnover in 2022 reflected the weakness of the stockmarket. Lower share prices imply higher upside to the Managers’ price targets, which, all else being equal, discourages changes to the portfolio. By extension, with rising share prices there should be more opportunity to realise value and redeploy the proceeds in other companies with higher upsides. The Managers term this the “value roll”. It can make an important contribution to ASCoT’s performance over time.

Environmental, social and governance (ESG)

The Managers integrate matters related to ESG into their investment process, in which relevant issues are considered alongside any other that affects a company’s profits and valuation. With its emphasis on bottom-up analysis and engagement, the process is well suited to this approach. In 2022, the Managers enhanced their tracking and assessment of ESG matters through the development of an additional module within their investment database. Over time, it is hoped that this will yield useful data, whose presentation will help Shareholders understand the portfolio’s ESG profile and, more ambitiously, any relationship between ESG issues and valuations. In the meantime, the work done to populate the new module has made it clear that small UK quoted companies are making significant progress in their ESG disclosures and, more importantly, are very much focused on the impact of issues such as climate change on their future profits and valuations. It is clear to the Managers that the perception of small companies as ESG victims is misplaced. This creates investment opportunity as companies’ continuing progress is rewarded with higher valuations over time. Further details of the Managers’ approach to ESG are set out on pages 13 to 15 of the Annual Report.

Resilience

In 2022, the stockmarket has been concerned about the impact of recession on companies’ profits and balance sheets. The typical decline in the profits of small companies in a recession is around one third. Previous downturns have been of varying lengths and depths, but have been followed by periods of recovering profits and share prices. One upside of the various crises to have peppered the past dozen or so years is that the management teams running small UK quoted companies are experienced in damage limitation – as one chief executive put it in a recent update, “we are battle-hardened”. This gives hope that the pressure of lower demand can be mitigated through cost control, even though the current inflationary forces complicate the task.

The more profound risk during a recession is that a company’s balance sheet proves vulnerable, preventing it from enjoying the subsequent rebound in trading conditions. In this regard, it is reassuring that the balance sheet profiles of both the portfolio and of small companies as a whole are robust. This is displayed in the following table, in which Tracked Universe refers to the 98% by value of the NSCI (XIC) that the Managers follow closely.

Weight in companies with:	Net cash	Net debt/EBITDA   < 2x	Net debt/EBITDA  > 2x	Other*
Portfolio: 2022	41%	40%	14%	5%
Tracked universe: 2022	34%	34%	22%	10%
*Includes loss-makers and lenders

The table shows that 41% of the portfolio is invested in companies with net cash on their balance sheets at the end of 2022. Another 40% is invested in companies with relatively low financial leverage (i.e. net debt to EBITDA ratios below two times). The portfolio’s profile compares well with that of the Tracked Universe. However, the index’s profile is also unusually robust. Balance sheets within the NSCI (XIC) last reached today’s degree of resilience in around 2014. That was five years after a recession, a period in which the boards of companies were so scarred by the experience of the credit crunch that they were reluctant to invest.

Back to today, companies are entering a likely recession with strong balance sheets. In this, the recency of the pandemic is influential: there has been little time to invest, while some companies benefited from government support and from equity issuance. Whatever the reason, today’s situation is unusual since recessions are often preceded by a period of corporate excess in the form of debt funded over-investment. There are caveats – notably the elevated inventories that some have taken on amid the supply chain problems and the relevance for the first time in years of interest cover covenants – but the balance sheet profile of both the portfolio and the index appears encouragingly resilient.

Valuations

The table below sets out the forward valuations of the portfolio, the Tracked Universe and certain subdivisions of the Tracked Universe. The metric displayed is enterprise value to earnings before interest, tax and amortisation (EV/EBITA), which the Managers use most often in valuing companies. The historical and forecast data underlying all the ratios are the Managers’.

EV/EBITA	2021	2022	2023	2024
ASCoT	7.4x	6.7x	6.2x	5.6x
Tracked Universe (245 stocks)	9.1x	8.9x	8.6x	7.8x
41 growth stocks	14.1x	12.8x	10.7x	9.0x
204 other stocks	8.5x	8.3x	8.2x	7.5x
91 stocks > £600m market cap	10.6x	10.0x	10.1x	8.9x
154 stocks < £600m market cap	6.9x	7.1x	6.4x	6.0x

The table demonstrates some familiar features. The ratios for the portfolio are meaningfully lower than those for the Tracked Universe, which is consistent with the Managers’ value investment philosophy. The growth stocks within the Tracked Universe remain particularly highly rated. This is despite their under-performance in 2022 and may suggest incremental vulnerability. Another relevant gauge of the portfolio’s value is to compare its 2022 EV/EBITA ratio with the 14x multiple at which the 19 takeover deals within the NSCI (XIC) in 2022 were agreed. The final two rows illustrate the stockmarket’s continuing reluctance to embrace “smaller small” companies: those with market capitalisations below £600m are considerably more attractively valued than are their larger peers. This explains why the portfolio’s weighting of 62% in the “smaller smalls” is higher than the NSCI (XIC)’s 33%.

In attempting to understand the portfolio’s present value opportunity, the Managers’ estimates underlying the 2023 and 2024 EV/EBITA ratios are uncertain. The principal influence on the estimates is engagement with the management teams running the companies. While they are well aware of the top down threats, many had not yet felt the full force of a downturn on their businesses by the end of 2022. In all likelihood, the first half of 2023 will see trading updates weakening and a reduction to profit estimates. Until the downgrade cycle has played out, valuation ratios based on forecast profits are of less use. However, to cut through this and contextualise the attractiveness of today’s valuations, there is a useful tool in the form of historical valuation ratios.

The table below of portfolio characteristics includes the historical PEs for the portfolio and the NSCI (XIC). Both were unusually low at 8.1x at 31 December 2022, with the index’s ratio refreshed by the significant rebalancing described previously. The two PEs are also calculated differently. The Managers remove one-off profits and losses from the portfolio’s earnings per share, but London Business School does not do so for the NSCI (XIC). At 31 December 2022, this flattered the index’s historical PE relative to the portfolio’s.

Portfolio characteristics	31 December 2022		31 December 2021
	ASCoT	NSCI (XIC)	ASCoT	NSCI (XIC)
Number of companies	79	350	77	337
Weighted average market capitalisation	£548m	£866m	£624m	£934m
Price earnings (PE) ratio (historical)	8.1x	8.1x	13.3x	16.6x
Dividend yield (historical)	3.5%	3.4%	1.9%	2.1%
Dividend cover	3.4x	3.7x	4.0x	2.9x

The chart in the link below puts the portfolio’s PE in the context of ASCoT’s history since inception in 1990. The chart in the link below also depicts the mean PE over the period of 12.2x and the plus one to minus one standard deviation range. ASCoT’s historical PE has dipped below the minus one standard deviation line on three previous occasions, all of which were coincident with recession: most recently the pandemic, in the middle the global financial crisis and to the far left of the chart the early 1990s recession. Breaching the minus one standard deviation line has been a useful indicator of subsequent good returns – it has historically indicated that much of the risk has been priced in, allowing the stockmarket to re-rate shares in advance of the recovery in profits.

https://mma.prnewswire.com/media/1991200/ASCoT_s_historical_PE_ratio_31_12_22.pdf

To take the argument to the next stage, it was noted above that small cap profits typically fall by one third in a recession, though over varying time periods. A repeat of that experience would take today’s historical PE of 8.1x to 12.1x. Despite being a multiple of what could be considered trough profits, this would be slightly below the portfolio’s long term average PE. Again, it may be inferred from this that much of the impact of a downturn on corporate profitability has been reflected in share prices. This does not mean that share prices will not fall from here since volatility is inevitable as companies report results affected by recession. However, the chart shows that the historical PE can rise substantially from present levels, as reported profits fall and as share prices start to anticipate recovery. The Managers are therefore confident in good returns from ASCoT’s portfolio over the medium and long term.

Outlook and conclusion

One of the second order effects of the pandemic has been to accelerate and accentuate several underlying challenges to the economic and financial conditions that have held sway since the global financial crisis. The conditions have been ones of modest economic growth, low interest rates and low inflation, while the underlying challenges have been broadly inflationary. These have included heightened geopolitical tension, deglobalisation, re-shoring, an upsurge in industrial action, and demographic trends that reduce the working age population. The war in Ukraine has given extra impetus to the first bout of meaningful inflation for decades. The chief executive of one of ASCoT’s investee companies has observed that what keeps him awake at night is not the price of electricity in 2023, but where his customers will be doing their business in five or ten years’ time as the tectonic plates of economics and geopolitics shift.

Year-on-year changes in the consumer prices index in the UK and further afield will likely moderate as effects of high energy prices annualise, but the structural issues listed above mean that the rate of inflation may not return reliably to the very low levels to which the world had become accustomed. It would therefore be unlikely that interest rates and bond yields can fall back to the very low levels that allowed investment with almost limitless time horizons. A reversion to financial conditions more akin to those that prevailed before the global financial crisis is not without risk. Governments and investors have adopted borrowing habits that may be exposed by the reimposition of a real cost of capital.  Accidents are possible, with signs of stress already in the UK’s liability driven investment industry, in cryptocurrency failures and in the higher cost of borrowing for private equity firms.

However, there is scope for optimism and opportunity too. A meaningful cost of capital, rather than one artificially suppressed by central banks, imposes discipline on investment decisions. This improves the chance of sustainably high returns on investment, which in turn might address the disappointingly low productivity performance of the UK and other economies in recent years. In parallel, trends such as deglobalisation and the re-shoring of production imply a period of higher capital expenditure, which would provide opportunities for business, including small UK quoted companies. A final consideration concerns the value investment style, which felt the headwinds of the low interest rate environment since the global financial crisis. A reversal would imply a better outlook for value or at least a more neutral style backdrop, which would be to ASCoT’s benefit.

Turning back to the portfolio, its valuations are unusually attractive at present. Of course, PE ratios do not fall so low unless the stockmarket is worried about something. In the case of ASCoT’s holdings, the wide-held concerns are their perceived vulnerability to recession and their “Britishness”, an attribute that has been shunned amid the political upheaval of recent years. On top of these factors is the evolution of a regulatory focus on risk and liquidity. This has discouraged institutional investment in smaller companies in a self-reinforcing vicious circle and accounts for the particularly low valuations of the “smaller small” companies from which ASCoT benefits.

If these are the reasons for the low valuations, why are they too low? At the broad level, it is the nature of equity markets to over-shoot. Indications that this might be the case are the PE ratio chart shown at the link and the fact that institutional allocations to UK equities have dwindled to very low levels. More specifically, the records of ASCoT’s holdings through the trials and tribulations of recent years have been good – these are resilient businesses with strong balance sheets and experienced management. Corroboration for this contention comes from 2022’s M&A activity: overseas businesses clearly disagree with the equity market and are willing to pay substantial valuation premiums for control.

Therefore, while trading conditions in 2023 are likely to be challenging, a good deal of the risk is likely already to be in the price. ASCoT’s closed end structure and tactical approach to gearing are well suited to navigating the near term uncertainty.  Refreshed by the NSCI (XIC)’s significant 2023 rebalancing, ASCoT’s investment universe harbours numerous opportunities for a value investor focused on understanding and engaging with the companies. Accordingly, the Managers look to future years with confidence that ASCoT can out-perform against the backdrop of what current valuations suggest should be a rising stockmarket.

Aberforth Partners

Managers

27 January 2023

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

On behalf of the Board

Richard Davidson

Chairman

27 January 2023

PRINCIPAL RISKS

The Board carefully considers the risks faced by the Company and seeks to manage these risks through continual review, evaluation, mitigating controls and action as necessary. A risk matrix for the Company is maintained. It groups risks into the following categories: portfolio management; investor relations; regulatory and legal; and financial reporting. Further information regarding the Board’s governance oversight of risk and the context for risks can be found in the Corporate Governance Report on page 35 of the Annual Report. The Audit Committee Report (pages 36 to 38 of the Annual Report) details the committee's review process, matters considered, and actions taken on internal controls and risks during the year. The Company outsources all the main operational activities to recognised, well-established firms and the Board receives internal control reports from these firms, where available, to review the effectiveness of their control frameworks. During the Covid-19 pandemic, these firms deployed alternative operational practices, including staff working remotely, to ensure continued business service. Many of these practices continue in operation in some form.

Emerging risks are those that could have a future impact on the Company. The Board regularly reviews them and, during the year, it added to the risk matrix potential economic risks arising from critical infrastructure security and global conflicts. This risk was grouped under the principal risk category of market risk, as described below. The Board monitors how the Managers integrate such risks into investment decision making.

Principal risks are those risks in the matrix that have the highest risk ratings. They tend to be relatively consistent from year to year given the nature of the Company and its business. The principal risks faced by the Company, together with the approach taken by the Board towards them, are summarised below. To indicate the level of monitoring required during this year each principal risk has been categorised as either dynamic risk, requiring detailed monitoring as it can change regularly, or stable risk.

Investment policy/performance risk
Risk–this is a portfolio management risk	Mitigation
The Company’s investment policy and strategy exposes the portfolio to share price movements. The performance of the investment portfolio typically differs from the performance of the benchmark and is influenced by stock selection, liquidity and market risk (see Market risk below and Note 19 of the Annual Report for further details). 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 risks inherent in diversified portfolios of small and large companies.	The Board monitors performance against the investment objective over the long term by ensuring the investment portfolio is managed appropriately, in accordance with the investment policy and strategy. The Board has outsourced portfolio management to experienced investment 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. This remains a dynamic risk, with detailed consideration during the year. The Managers’ Report contains information on portfolio investment performance and risk.

Market risk
Risk–this is a portfolio management risk	Mitigation
Investment performance is affected by external market risk factors, including those creating uncertainty about future price movements of investments. The Board delegates consideration of market risk to the Managers to be carried out as part of the investment process.	The Managers regularly assess the exposure to market risk when making investment decisions and the Board monitors the results via the Managers’ quarterly and other reporting. The Board and Managers closely monitor significant economic and political developments and, in particular, are mindful of the continued uncertainty following the departure of the UK from the EU, effects of the Ukraine/Russian war and escalations, the impacts of the Covid-19 pandemic and government responses, and the potential effects of climate change. This remained a dynamic risk during the year, in which the Managers reported on market risks including inflation and supply- chain pressures, energy security, recession and other geopolitical issues as addressed in the Managers’ Report.

Share price discount
Risk–this is an investor relations risk	Mitigation
Investment trust shares tend to trade at discounts to their underlying net asset values, but a significant share price discount, or related volatility, could reduce shareholder returns and confidence.	The Board and the Managers monitor the discount daily, both in absolute terms and relative to ASCoT’s peers. In this context, the Board intends to continue to use the buy- back authority as described in the Directors’ Report (in the Annual Report). This is considered a dynamic risk as the discount moves daily.

Gearing risk
Risk–this is a portfolio management risk	Mitigation
In rising markets, gearing enhances returns, but in falling markets it reduces returns to shareholders.	The Board and the Managers have specifically considered the gearing strategy and associated risks during the year. At present this is a dynamic risk as the Company’s tactical gearing facility is partially deployed.

Reputational risk
Risk–this is an investor relations risk	Mitigation
The reputation of the Company is important in maintaining the confidence of shareholders.	The Board and the Managers monitor factors that may affect the reputation of the Company and/or of its main service providers and take action if appropriate. The Board reviews relevant internal control reporting for critical outsourced service providers. This has been monitored as a stable risk.

Regulatory risk
Risk–this is a regulatory and legal risk	Mitigation
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. This is a stable risk.

Going Concern

The Audit Committee has undertaken and documented an assessment of whether the Company is a going concern for the period of at least 12 months from the date of approval of the financial statements. The Committee reported the results of its assessment to the Board.

The Company’s business activities, capital structure and borrowing facilities, together with the factors likely to affect its development and performance, are set out in the Strategic Report. In addition, the Annual Report includes the Company’s objectives, policies and processes for managing its capital and financial risk, along with details of its financial instruments and its exposures to credit risk and liquidity risk. The Company’s assets comprise mainly readily realisable equity securities and funding flexibility can typically be achieved through the use of the borrowing facilities, which are described in note 12 of the Annual Report. The Company has adequate financial resources to enable it to meet its day-to-day working capital requirements.

In summary and taking into consideration all available information, the Directors have concluded it is appropriate to continue to prepare the financial statements on a going concern basis.

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 2022

(audited)

	For the year ended			For the year ended
	31 December 2022			31 December 2021
	Revenue	Capital	Total	Revenue	Capital	Total
	£000	£000	£000	£000	£000	£000
Net (losses)/gains on investments	-	(195,756)	(195,756)	-	344,608	344,608
Investment income	53,188	-	53,188	37,331	-	37,331
Other income	7	-	7	125	-	125
Investment management fee	(3,513)	(5,855)	(9,368)	(3,752)	(6,253)	(10,005)
Portfolio transaction costs	-	(2,078)	(2,078)	-	(2,790)	(2,790)
Other expenses	(808)	-	(808)	(811)	-	(811)
	--------	--------	--------	--------	--------	--------
Net return before finance costs	48,874	(203,689)	(154,815)	32,893	335,565	368,458
and tax
Finance costs	(704)	(1,173)	(1,877)	(349)	(583)	(932)
	--------	--------	--------	--------	--------	--------
Return on ordinary activities	48,170	(204,862)	(156,692)	32,544	334,982	367,526
before tax
Tax on ordinary activities	-	-	-	-	-	-
	--------	--------	--------	--------	--------	--------
Return attributable to
equity shareholders	48,170	(204,862)	(156,692)	32,544	334,982	367,526
	======	=======	=======	======	=======	=======
Returns per Ordinary Share (Note 4)	55.64p	(236.64)p	(181.00)p	36.76p	378.43p	415.19p

The Board declared on 27 January 2023 a final dividend of 26.95p per Ordinary Share and a special dividend of 8.30p per Ordinary Share. The Board declared on 26 July 2022 an interim dividend of 12.05p 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 2022

(audited)

		Capital
	Share	redemption	Special	Capital	Revenue
	capital	reserve	reserve	reserve	reserve	Total
	£000	£000	£000	£000	£000	£000
Balance as at 31 December 2021	879	109	83,777	1,314,545	73,255	1,472,565
Return on ordinary activities after taxation	-	-	-	(204,862)	48,170	(156,692)
Equity dividends paid (Note 3)	-	-	-	-	(31,707)	(31,707)
Purchase of Ordinary Shares	(26)	26	(33,296)	-	-	(33,296)
	--------	--------	--------	--------	--------	--------
Balance as at 31 December 2022	853	135	50,481	1,109,683	89,718	1,250,870
	======	======	======	======	======	======

For the year ended 31 December 2021

(audited)

		Capital
	Share	redemption	Special	Capital	Revenue
	capital	reserve	reserve	reserve	reserve	Total
	£000	£000	£000	£000	£000	£000
Balance as at 31 December 2020	888	100	96,663	979,563	70,716	1,147,930
Return on ordinary activities after taxation	-	-	-	334,982	32,544	367,526
Equity dividends paid (Note 3)	-	-	-	-	(30,005)	(30,005)
Purchase of Ordinary Shares	(9)	9	(12,886)	-	-	(12,886)
	--------	--------	--------	--------	--------	--------
Balance as at 31 December 2021	879	109	83,777	1,314,545	73,255	1,472,565
	======	======	======	======	======	======

BALANCE SHEET

As at 31 December 2022

(audited)

	31 December	31 December
	2022	2021
	£000	£000
Fixed assets
Investments at fair value through profit or loss (Note 5)	1,322,261	1,554,585
	----------	----------
Current assets
Debtors	2,145	1,875
Cash at bank	1,668	3,418
	----------	----------
	3,813	5,293
Creditors (amounts falling due within one year)	(75,204)	(905)
	----------	----------
Net current (liabilities)/assets	(71,391)	4,388
	----------	----------
Total Assets less Current Liabilities	1,250,870	1,558,973
Creditors (amounts falling due after more than one year)	-	(86,408)
	----------	----------
Total Net Assets	1,250,870	1,472,565
	=======	=======
Capital and reserves: equity interests
Called up share capital	853	879
Capital redemption reserve	135	109
Special reserve	50,481	83,777
Capital reserve	1,109,683	1,314,545
Revenue reserve	89,718	73,255
	----------	----------
Total Shareholders’ Funds	1,250,870	1,472,565
	=======	=======
Net Asset Value per Ordinary Share (Note 6)	1,465.67p	1,674.35p

CASH FLOW STATEMENT

For the year ended 31 December 2022

(audited)

	31 December 2022		31 December 2021
		£000		£000
Operating activities
Net revenue before finance costs and tax		48,874		32,893
Investment management fee charged to capital		(5,855)		(6,253)
(Increase) in debtors		(365)		(812)
(Decrease)/increase in other creditors		(24)		37
		--------		--------
Net cash inflow from operating activities		42,630		25,865
		=====		=====
Investing activities
Purchases of investments		(250,161)		(381,045)
Sales of investments		284,746		385,146
		--------		--------
Cash inflow from investing activities		34,585		4,101
		=====		=====
Financing activities
Purchases of Ordinary Shares		(34,026)		(12,156)
Equity dividends paid (Note 3)		(31,707)		(30,005)
Interest and fees paid		(1,732)		(850)
Gross drawdowns of bank debt facilities  (before any costs)		126,000		134,000
Gross repayments of bank debt facilities  (before any costs)		(137,500)		(120,500)
		--------		--------
Cash (outflow) from financing activities		(78,965)		(29,511)
		=====		=====
Change in cash during the period		(1,750)		455
		=====		=====
Cash at the start of the period		3,418		2,963
Cash at the end of the period		1,668		3,418
		======		======

SUMMARY NOTES TO THE FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES     

The financial statements have been presented under Financial Reporting Standard 102 ("FRS 102") and under the AIC’s Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” ("SORP") issued in 2022. 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 described below. The Directors' assessment of the basis of going concern is described on page 29 of the Annual Report. The functional and presentation currency is pounds sterling, which is the currency of the environment in which the Company operates. The Board confirms that no critical accounting judgements or significant sources of estimation uncertainty have been applied to the financial statements and therefore there is not a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

2. INVESTMENT MANAGEMENT FEE

The Managers, Aberforth Partners LLP, receive an annual management fee, payable quarterly in advance, equal to 0.75% of net assets up to £1 billion, and 0.65% thereafter. The investment management fee has been allocated 62.5% to capital reserve and 37.5% to revenue reserve, in line with the Board’s expected long term split of returns, in the form of capital gains and income respectively, from the investment portfolio of the Company.

3. DIVIDENDS   

	Year to 31 December 2022 £000	Year to 31 December 2021 £000
Amounts recognised as distributions to equity holders in the period:
Final dividend for the year ended 31 December 2021 of 24.25p (2020: 22.90p) paid on 8 March 2022	21,262	20,318
Interim dividend for the year ended 31 December 2022 of 12.05p (2021: 10.95p) paid on 26 August 2022	10,445	9,687
	------------	------------
	31,707	30,005
	------------	------------

The final dividend of 26.95p (2021: 24.25p) and special dividend of 8.30p (2021: nil) for the year ended 31 December 2022 will be paid, subject to shareholder approval, on 8 March 2023. The final dividends for 2022 and 2021 and the special dividend for 2022 have not been included as liabilities in the financial statements.

4. RETURNS PER ORDINARY SHARE       

	Year to 31 December 2022	Year to 31 December 2021
The returns per Ordinary Share are based on: Returns attributable to Ordinary Shareholders	£(156,692,000)	£367,526,000
Weighted average number of shares in issue during the year	86,570,115	88,519,932
Returns per Ordinary Share	(181.00)p	415.19p

There are no dilutive or potentially dilutive shares in issue.

5. 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 2022	Level 1 £000	Level 2 £000	Level 3 £000	Total £000
Listed equities	1,322,261	-	-	1,322,261
Unlisted equities	-	-	-	-
	------------	------------	------------	------------
Total financial asset investments	1,322,261	-	-	1,322,261
	------------	------------	------------	------------

As at 31 December 2021	Level 1 £000	Level 2 £000	Level 3 £000	Total £000
Listed equities	1,554,585	-	-	1,554,585
Unlisted equities	-	-	-	-
	------------	------------	------------	------------
Total financial asset investments	1,554,585	-	-	1,554,585
	------------	------------	------------	------------

6. NET ASSET VALUE PER SHARE         

The Net Asset Value per share and the net assets attributable to the Ordinary Shares at the year end are calculated in accordance with their entitlements in the Articles of Association and were as follows. 

	31 December 2022	31 December 2021
Net assets attributable	£1,250,870,000	£1,472,565,000
Ordinary Shares in issue at the end of the year	85,344,605	87,948,266
Net Asset Value per Ordinary Share	1,465.67p	1,674.35p

7. SHARE CAPITAL

During the year, the Company bought back and cancelled 2,603,661 shares (2021: 874,800) at a total cost of £33,296,000 (2021: £12,886,000). During the period 1 January to 27 January 2023, no shares have been bought back for cancellation.

8. RELATED PARTY TRANSACTIONS

The Directors have been identified as related parties and their fees and shareholdings are detailed in the Directors’ Remuneration Report on pages 40 and 41 of the Annual Report. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006.

9. 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 2021 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 by 6 February 2023.  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: Euan Macdonald or Jeremy Hall, Aberforth Partners LLP, 0131 220 0733

Aberforth Partners LLP, Secretaries – 27 January 2023

ANNOUNCEMENT ENDS