Annual Financial Report
Invesco Perpetual UK Smaller Companies Investment Trust plc
Annual Financial Report Announcement
For the year ended 31 January 2014
FINANCIAL HIGHLIGHTS
The Benchmark Index of the Company is the Numis Smaller Companies Index
(excluding Investment Companies) with income reinvested.
AT AT
31 JANUARY 31 JANUARY %
2014 2013 CHANGE
Net asset value per ordinary
share(1):
  - balance sheet 367.9p 285.7p +28.8%
  - after charging proposed 363.0p 281.3p +29.0%
dividends (capital NAV)
Shareholders' funds (£'000)(1) 195,749 152,034 +28.8%
Mid-market price per ordinary 316.8p 246.5p +28.5%
share
Discount(1) per ordinary share 13.9% 13.7%
based on balance sheet NAV
Total return (with income
reinvested):
Net asset value(1)(2)(3) +31.4%
Benchmark Index(2)(3) +31.8%
FTSE All-Share Index(3) +10.1%
Capital return:
Net asset value(1)(2) +29.0%
Benchmark Index, excluding income +28.2%
reinvested(2)(3)
FTSE All-Share Index(3) +6.4%
Gearing:
  - gross gearing(2) 1.2% nil
  - net gearing(2) nil nil
  - net cash(2) 1.2% 5.1%
Maximum permissible gearing(2) 10.2% 13.2%
Return and dividend per ordinary
share:
Revenue return 6.9p 6.3p
Capital return 81.2p 46.7p
Total return 88.1p 53.0p
Interim dividend 1.6p 1.6p
Final dividend 4.9p 4.4p
Total dividends 6.5p 6.0p +8.3%
Ongoing charges(2)
  - excluding performance fee 0.83% 0.87%
  - performance fee nil nil
Note: (1) Includes enhancements from share repurchases.
(2) The term is defined in the Glossary on page 57 of the
Annual Financial Report.
(3) Source: Thomson Reuters Datastream.
.
STRATEGIC REPORT
CHAIRMAN'S STATEMENT
I am pleased to report substantial growth in the net asset value (NAV) of your
Company, which rose by 31.4% on a total return basis during the financial year
to 31 January 2014. This return was broadly in line with the Numis Smaller
Companies Index (excluding Investment Companies), the Company's benchmark
index, which returned 31.8%. In absolute terms, this was an excellent result.
By comparison, your Company and the UK Smaller Companies sector as a whole
significantly out-performed the wider UK stock market, as measured by the FTSE
All-Share Index, which rose by 10.1%. This demonstrates the ability of Smaller
Companies to outperform their larger counterparts under certain economic
conditions and this was particularly evident during the 12 months to 31 January
2014.
Over the same period, the mid-market price of the Company's shares increased by
28.5%, from 246.5p to 316.8p per share. Having narrowed during the year, the
discount to NAV at which the Company's shares trade ended the year marginally
wider at 13.9% compared with 13.7% at the end of the previous financial year.
Dividend
For the year ended 31 January 2014, an interim dividend of 1.6 pence per share
was paid on 24 October 2013 to those shareholders who were on the register on
27 September 2013. The Board is proposing a final dividend of 4.9 pence per
share payable on 6 June 2014 to shareholders who are on the register on 25
April 2014. Total dividends for the year to 31 January 2014 will therefore
amount to 6.5 pence per share, a 8.3% increase on the previous year. The income
of the Company includes £0.6m or 1.1 pence per share (2013: £0.3m or 0.6 pence)
of special dividends. By their nature, special dividends are non-recurring and
future dividends, will, as always, depend on market conditions and investment
performance.
The Future of the Company
As previously announced, on or around the date of its AGM in 2017, the Board
will make available a number of options for shareholders to consider. These may
include one or more of a continuation of the existing Company, a rollover into
a similar or other investment vehicle and/or the provision of a cash exit at a
price close to NAV. One of the benefits the Board hopes to achieve by this
initiative is a narrowing of the discount to NAV at which the shares trade.
The Board expects this benefit to become more apparent over time.
The Board
On 17 December 2013, the Board appointed Jane Lewis as a new director of the
Company and in accordance with the Company's articles of association she will
stand for election by shareholders at the forthcoming Annual General Meeting.
Jane is an investment trust specialist who, until August of 2013, held the
position of Director of Corporate Finance & Broking at Winterflood Investment
Trusts. The Board believes that Jane's broad investment trust experience will
prove be to be a great asset to the Company. In addition, John Spooner has
decided that he will not seek re-election at the Company's Annual General
Meeting and will therefore retire from the Board at its conclusion. The Board
would like to take this opportunity to thank John for his long and substantial
contribution to the success of the Company during his tenure and to wish him
well in the future.
Annual General Meeting
The Directors have carefully considered all of the resolutions proposed in the
Notice of the AGM and believe them to be in the best interests of shareholders
and the Company as a whole. The Directors, accordingly, recommend that
shareholders vote in favour of each resolution.
Retirement of Richard Smith
Richard has managed your Company's portfolio since 2002 and the Board is aware
of, and is grateful for, the great contribution he has made, both to the
delivery of investment performance and through his wise counsel to the Board
over that period. Richard is retiring at the end of June 2014 and my fellow
Directors and I wish him a long, happy and very well-deserved retirement.
Jonathan Brown, Richard's co-manager, has been appointed Head of Smaller
Companies at Invesco Perpetual and was formally appointed lead manager of your
Company's portfolio on 30 December 2013, in anticipation of Richard's
retirement. He has considerable experience working with Richard and the Board
is confident that he will continue to manage shareholders' investments with
great skill.
Outlook
As ever, your portfolio managers have given a very full account of the year's
performance in their report that follows. In terms of the year under review,
the most surprising aspect may be the lacklustre performance of the emerging
economies, just as it was thought that they were somehow immune from the
effects of the banking crisis that started in 2008. Clearly, reduced demand
from western economies as belts were tightened due to austerity measures has
had more of an effect than first thought and any suggestion of a "de-coupling"
from the west has now been dismissed.
Whilst this region may seem disconnected from the fortunes of smaller companies
in the UK, the effect of a "hard landing" for the Chinese economy and the
ramifications worldwide should not be underestimated. However, as you will
read, the portfolio managers continue to find plenty of good investment
opportunities within the smaller companies sector. Given the likelihood of some
level of domestic stimulus ahead of the 2015 General Election, they
remain positive for future returns.
Ian Barby
Chairman
8 April 2014
.
BUSINESS REVIEW
FOR THE YEAR ENDED 31 JANUARY 2014
Invesco Perpetual UK Smaller Companies Investment Trust plc is an investment
company and its investment objective is set out below. The strategy the Board
follows to achieve that objective is to set investment policy and risk
guidelines, together with investment limits, and to monitor how they are
applied. These are also set out below and have been approved by shareholders.
The Company has contracted the services of Invesco Asset Management Limited
(the `Manager') to manage the portfolio in accordance with the Board's strategy
and under its oversight. The portfolio managers responsible for the day to day
management of the portfolio are Jonathan Brown and, until his planned
retirement in June 2014, Richard Smith, at which date Jonathan becomes the sole
named portfolio manager.
Investment Objective
The Company is an investment trust whose investment objective is to achieve
long-term total return for shareholders primarily by investment in a broad
cross-section of small to medium sized UK quoted companies. The pursuit of
income is of secondary importance.
Investment Policy
The portfolio primarily comprises shares traded on the London Stock Exchange,
though it will also usually include a smaller proportion traded on AIM. The
portfolio managers can also invest in unquoted securities, though these are
limited to a maximum of 5% of gross assets at the time of acquisition.
The Manager seeks to outperform the benchmark index. As a result, the Manager's
approach can, and often does, result in significant overweight or underweight
positions in individual stocks or sectors compared with the benchmark. Sector
weightings are ultimately determined by stock selection decisions.
Risk diversification is sought through a broad exposure to the market, where no
single investment may exceed 5% of the Company's gross assets at the time of
acquisition. The Company may utilise index futures to hedge risk of no more
than 10% and other derivatives (including warrants) of no more than 5%. In
addition, the Company will not invest more than 10% in collective investment
schemes or investment companies, nor more than 10% in non-UK domiciled
companies. All these limits are referenced to gross assets at the time of
acquisition.
Borrowings may be used to raise market exposure up to the lower of 30% of net
asset value and £25 million.
Performance
The Board reviews performance by reference to a number of Key Performance
Indicators which include the following:
• the movement in net asset values (NAV) per share on a total return basis;
• the performance relative to the peer group;
• the discount;
• dividend per share;
• the ongoing charges; and
• the risk and volatility.
The ten year record for the NAV and share price performance compared with the
Company's benchmark index can be found on page 3 of the Annual Financial
Report, together with the five year discount record. The five year record for
dividends and ongoing charges is found on page 4 of the Annual Financial
Report. Returns versus volatility can be found on the graph on page 12 of the
Annual Financial Report.
Results and Dividends
In the year ended 31 January 2014 the net asset value total return was 31.4%
compared with a total return on the benchmark index of 31.8%. The discount at
the year end was 13.9%. The Portfolio Managers' Report analyses the relative
performance in a table on page 12 of the Annual Financial Report.
For the year ended 31 January 2014, an interim dividend of 1.6p per ordinary
share was paid to shareholders on 24 October 2013. A final dividend of 4.9p per
ordinary share will be proposed to shareholders at the AGM on 5 June 2014 and
will be paid on 6 June 2014 to shareholders on the register on 25 April 2014.
The revenue return per ordinary share was 6.9p.
Financial Position and Borrowings
At 31 January 2014 the Company's net assets were valued at £196 million (2013:
£152.0 million) comprising a portfolio of equity investments and net current
assets, including £2.4 million of borrowings (2013: nil). Borrowings, which are
authorised by shareholders up to a maximum of £25 million, are currently funded
by the Company's uncommitted bank overdraft facility. This facility has a
maximum of the lower of 30% of net asset value and £20 million.
Outlook, including the Future of the Company
The main trends and factors likely to affect the future development,
performance and position of the Company's business can be found in the
Portfolio Managers' Report of this Strategic Report. Further details of the
principal risks affecting the Company are set out under `Principal Risks and
Uncertainties'.
As previously announced, on or around the Company's AGM in 2017, the Board will
make available options for shareholders as set out in the Chairman's Statement.
The Board has assured shareholders that the Manager will continue to use its
best endeavours to attempt to achieve above-average performance and thereby
earn the authority from shareholders for the Company's continuation.
In time, one of the benefits the Board hopes to achieve by this initiative is a
narrowing in the discount to NAV at which the shares trade. The Board expects
this benefit to become more apparent over time. The Board will retain the right
to buy back shares on an ad hoc basis.
Principal Risks and Uncertainties
The most significant risks of the Company and the steps taken to mitigate them
follow. Most of these risks are market related and are similar to those of
other investment trusts investing primarily in listed markets.
Market (Economic) Risk
Factors such as general fluctuations in stock markets, interest rates and
exchange rates are not under the control of the Board and the portfolio
managers, but may give rise to high levels of volatility in the share prices of
investee companies, as well as affecting the Company's own share price and
discount to NAV. To a limited extent futures can be used to mitigate this risk.
Investment Risk
The Company invests in small and medium-sized companies traded on the London
Stock Exchange or on AIM. By their nature these are generally considered
riskier than their larger counterparts and their share prices can be more
volatile, with lower liquidity. In addition, as smaller companies do not
generally have the financial strength, diversity and resources of larger
companies, they may find it more difficult to overcome periods of economic
slowdown or recession.
The portfolio managers' approach to investment is one of individual stock
selection. Investment risk is mitigated via the stock selection process,
together with the slow build-up of holdings rather than the purchase of large
positions outright. This allows the portfolio managers to observe more data
points from a company before adding to a position. The overall portfolio is
well diversified by company and sector. The weighting of an investment in the
portfolio tends to be loosely aligned with the market capitalisation of that
company. This means that the largest holdings will often be amongst the larger
of the smaller companies available.
The portfolio managers are relatively risk averse, look for lower volatility in
the portfolio and seek to outperform in more challenging markets. In comparison
to peer group investment trusts, the Company's portfolio often has a higher
than average market capitalisation and a lower than average exposure to the AIM
market. The portfolio managers remain cognisant at all times of the potential
liquidity of the portfolio.
There can be no guarantee that the Company's strategy and business model will
be successful in achieving its investment objective. The Board monitors the
performance of the Company and has guidelines in place to ensure that the
portfolio managers adhere to the approved investment policy. The continuation
of the portfolio managers' mandate is reviewed annually.
Shareholders' Risk
The value of an investment in the Company may go down as well as up and an
investor may not get back the amount invested.
Whilst the Directors intend to pay a dividend to ordinary shareholders each
year, this depends on the level and timing of income received from investee
securities, expenses of the Company and the amount of any distributable
reserves. As a result, the amount of the Company's dividend payments cannot be
certain.
The Board and the portfolio managers maintain an active dialogue with the aim
of ensuring that the market rating of the Company's shares reflects the
underlying net asset value; and there are in place both share buy back and
issuance facilities to help the management of this process.
Borrowings
The Company may borrow money for investment purposes. If the investments fall
in value, any borrowings (or gearing) will magnify the extent of any loss. If
the borrowing facility could not be renewed, the Company might have to sell
investments to repay any borrowings made under it. All borrowing and gearing
levels are reviewed at every Board meeting and preset limits agreed.
Reliance on the Manager and other Third Party Providers
The Company has no employees and the Directors have all been appointed on a
non-executive basis. The Company is therefore reliant upon the performance of
third party providers both for its executive function and other service
provision. In particular, the Manager performs services which are integral to
the operation of the Company. Failure by any service provider to carry out its
obligations to the Company in accordance with the terms of its appointment
could have a materially detrimental impact on the operation of the Company and
could affect the ability of the Company to successfully pursue its investment
policy.
The Manager may be exposed to reputational risks. In particular, the Manager
may be exposed to the risk that litigation, misconduct, operational failures,
negative publicity and press speculation, whether or not it is valid, will harm
its reputation. Any damage to the reputation of the Manager could result in
potential counterparties and third parties being unwilling to deal with the
Manager and by extension the Company, which carries the Manager's name. This
could have an adverse impact on the ability of the Company to pursue its
investment policy successfully. The Company's main service providers are listed
on page 56 of the Annual Financial Report.
The Audit Committee regularly reviews the performance and internal controls of
the Manager. The results of which are reported to the Board. The Manager
reviews the performance of all third party providers regularly through formal
and informal meetings.
Regulatory Risk
The Company is subject to various laws and regulations by virtue of its status
as an investment trust, and its listing on the London Stock Exchange. A loss of
investment trust status could lead to the Company being subject to capital
gains tax on the sale of its investments. Other control failures, either by the
Manager or any other of the Company's service providers, may result in
operational or reputational problems, erroneous disclosures or loss of assets
through fraud, as well as breaches of regulations.
The Manager reviews the level of compliance with tax and other financial
regulatory requirements on a daily basis. The Board regularly considers all
risks, the measures in place to control them and the possibility of any other
risks that could arise. The Manager's Compliance and Internal Audit Officers
produce regular reports for review at the Company's Audit Committee.
Further details of risks and risk management policies as they relate to the
financial assets and liabilities of the Company are detailed in note 19 to the
financial statements.
Alternative Investment Fund Managers Directive (AIFMD)
The Board is taking independent legal advice in relation to the Directive and
has decided, in principle, to appoint Invesco Fund Managers Limited (IFML) as
the Company's Alternative Investment Fund Manager, pending IFML's approval as
such by the Financial Conduct Authority. IFML is an associated company of
Invesco Asset Management Limited (IAML), the current Manager, and it is
expected that IAML will continue to manage the Company's investments under
delegated authority from IFML.
An additional requirement of the AIFMD is for the Company to appoint a
depositary, which will oversee the custody and cash arrangements and other AIFMD
required depository responsibilities. To this end, the Board has agreed in
principle to appoint BNY Mellon Trust & Depository (UK) Limited to act as the
Company's depositary.
Board Diversity
The Company's policy on diversity is set out on page 23 of the Annual Financial
Report. The Board considers diversity, including the balance of skills,
knowledge, diversity (including gender) and experience, amongst other factors
when reviewing its composition and appointing new directors, but does not
consider it appropriate to establish targets or quotas in this regard.
Following a review of the Board, Jane Lewis was appointed on 17 December 2013.
As reported in the Chairman's Statement, John Spooner will retire at the AGM,
this will return the Board back to its normal membership of five Directors at
which point there will be 20% female representation. The Company has no
employees.
Social and Environmental Matters
As an investment company with no employees, property or activities outside
investment, environmental policy has limited application. The Manager considers
various factors when evaluating potential investments. While a company's policy
towards the environment and social responsibility, including with regard to
human rights, is considered as part of the overall assessment of risk and
suitability for the portfolio, the Manager does not necessarily decide to, or
not to, make an investment on environmental and social grounds alone. The
Manager applies the United Nations Principles for Responsible Investment.
.
PORTFOLIO MANAGERS' REPORT
FOR THE YEAR ENDED 31 JANUARY 2014
Investment Review
In the year under review, there was a strong performance again by developed
country stock markets, however, emerging markets fell out of favour. Many stock
markets have now significantly surpassed their highs of 2007, recovering all
the ground lost during the global financial crisis. Although global debt levels
remain high by historical standards, the fear of an impending economic
catastrophe has abated, which combined with a continued flow of cheap money has
led to a return of "animal spirits" to the world's equity markets. The much
heralded tapering of QE by the Federal Reserve has so far been shrugged off
although, in truth, it is merely a reduction in the pace of stimulus, rather
than any kind of reversal. The one weak spot globally has been the emerging
countries, which is disappointing, as they had come through the banking crisis
relatively unscathed. Much of the uncertainty is focused on China, which
appears to be suffering a hangover from an extended period of rapid, capital
intensive growth. This could eventually have implications far beyond its own
borders, but for now is being counter-balanced by the improving economic
outlook in developed countries.
The UK stock market, as measured by the FTSE All-Share Index, rose 10.1% on a
total return basis. With a general election on the way in 2015, politicians
have stepped up efforts to create economic growth, primarily through
stimulating the housing market. This has gone some way to offset the continued
erosion in household spending power resulting from wage settlements lagging
increases in the cost of living. The result is that economic growth has shown a
strong improvement over the course of the year, leading to an increase in
private sector job creation and a modest improvement in the UK current account
deficit. This environment has been particularly favourable for the UK smaller
companies sector, which can provide investors with exposure to the higher
growth niches within the economy. In the year to 31 January 2014, the benchmark
index, the Numis Smaller Companies Index (ex investment Companies), rose 31.8%
on a total return basis. This is a continuation of the colossal outperformance
by smaller companies over the wider UK equities market seen over the last few
years. Since 2009, the Numis Smaller Companies Index (ex investment Companies),
has increased 240.9% on a total return basis, whereas the FTSE All Share has
returned a "mere" 100.9% on the same basis.
Portfolio Strategy and Review
Against this background, your Company produced an increase in net asset value
on a total return basis of 31.4% for the fiscal year. Positive contributions
came from the Industrial and Support Service sectors, while the portfolio's
exposure to the Oil & Gas and Mining sectors negatively affected performance.
At the individual stock level, the stand-out performer was Xaar, a world
leading manufacturer of digital print-heads (+292%).
It had an extraordinary year, helped by demand from the ceramic tile industry
in China. Howden Joinery (+82%), which is a leading manufacturer of
pre-fabricated kitchens, benefitted from improving trends in the housing market
and its ability to continue to take market share. The portfolio also benefited
from strong performance by a number of its largest holdings; Senior, an
aerospace and automotive component manufacturer (+49%) and RWS, a global leader
in the specialist area of patent translation (+60%), while Euromoney (+50%), a
media and information vendor serving the financial markets, performed strongly,
aided by acquisitions and an improvement in its end market. While contributors
to the portfolio substantially outweighed detractors, there were
disappointments from Premier Oil (-28%) which suffered from production
downgrades and a perception that management had overstretched themselves with
an acquisition in the Falkland Islands. Subsequently, there has been a change
in management, which should result in the Company's and Shareholders' interests
becoming better aligned, with an increased focus on cash returns, rather than
acquisitions. Perform Group (-52%), a media business specialising in the
exploitation of on-line sports content, issued a number of profit warnings. The
position has been sold following a partial recovery in the share price after
the year end. IQE, a manufacturer of compound semiconductors primarily for use
in the consumer electronics industry (-34%), was hurt by a shift to a cheaper
technology which might limit the future growth of the business.
The following table analyses the performance of the Company's NAV relative to
the Benchmark.
Invesco Perpetual UK Smaller Companies Investment Trust plc
Performance attribution for the year ended 31 January 2014
Total Absolute
%
Net asset value total return 31.4
Benchmark total return 31.8
Relative under performance (0.4)
Analysis of Relative Performance
Portfolio total return 32.3
Benchmark total return (31.8)
Portfolio over performance 0.5
Net gearing effect 0.1
Management fees (0.8)
Performance fees -
Interest payable -
Other expenses (0.2)
Total (0.4)
Performance attribution analyses the Company's performance relative to its
benchmark. Portfolio over performance measures the relative effect of the
Company's investment portfolio against that of its benchmark. Net gearing
effect measures the impact of borrowings and cash on the Company's relative
performance. This is nil where there is no gearing in a year. Management fees,
performance fees, other expenses and interest payable reduce the level of
assets and therefore result in a negative effect for relative performance.
There are no fees or expenses imputed to the benchmark index.
Investment Strategy
The current economic theme in developed economies is one of recovery. Several
years have elapsed since the onset of the financial crisis and although many of
the issues resulting from this remain unresolved, a great deal of progress has
also been made. This is most apparent in the US, which saw improving economic
growth in 2013, despite dealing with mandatory spending cuts and a government
shut down during the year. There is no doubt that the US has a more dynamic
capitalist economy than those of Europe, which has enabled the country to
cleanse its banking system, have a proper correction in real estate prices and
see its labour market begin to recover. The country still has hurdles to
overcome, principally its high level of indebtedness, which remains manageable
due to low interest rates, aided by US dollar's status as the global reserve
currency. The country also enjoys a favourable energy cost structure due to its
shale gas boom, which places it at a significant advantage to Europe where
energy prices can be 50% higher. The US seems well placed to outperform most of
the other developed nations' economies.
There are signs of a potential credit crisis in China, and the political
initiatives undertaken to moderate the degree of lending have reduced economic
growth. Whilst still growing at a rate well in excess of most the world's
economies, this moderation has had significant impact on many emerging
countries. Until recently, China had been experiencing the most commodity
intensive period of growth ever seen, and the fall in demand for commodities
has created a difficult environment for many resource rich countries. The
resulting slowing of economic growth has led to an outflow of capital, causing
marked currency weakness, which has in turn led to a drop in living standards.
In response, governments have raised interest rates to defend their currencies;
however, this is likely to exert further downward pressure on their economies.
All of that said, many of the emerging economies have a lot going for them;
young and vibrant populations; strong public sector balance sheets, and a
wealth of natural resources, all of which augurs well for the future.
The European economy has also seen some modest improvement, albeit off a low
base. Exports have increased, despite a strong Euro compared with a number of
world currencies, primarily due to a correction in the cost of labour within
some of the peripheral countries. Whilst helping competitiveness, it does pose
problems for consumer demand within those economies, raising the spectre of
deflation. This would pose a significant problem for the region, which is still
suffering from over indebtedness in the wake of the financial crisis. The
continent needs nominal economic growth (ie. real growth plus inflation), to
reduce the debt burden relative to the size of national incomes. The current
low inflation, low growth environment is hampering this process and outright
deflation could have serious consequences. There is cause for optimism however,
with the unemployment slowly moderating, albeit from very high levels, and with
the political situation stabilising a more favourable business environment may
be about to emerge.
With a UK general election approaching in 2015, it was inevitable that the
government would be keen to stimulate growth ahead of the event. The housing
market has been central to this and the Help To Buy scheme has driven a
significant increase in both prices and transaction volumes. This has to some
extent buoyed consumer sentiment, along with the receipt of billions of pounds
in PPI compensation and a more stable jobs outlook. This, combined with a
lessening of government austerity, has driven an acceleration in UK GDP growth
over the period. There is a fear that this improvement is largely built on yet
more debt, both public and household, and might therefore be unsustainable;
however, it has not yet led to an overall increase in money supply, or
inflation, giving policy makers plenty of scope to continue on the current
path. The improvement in these areas has yet to feed through to the corporate
sector in any meaningful way. Despite the strong increase in company valuations
we have seen over the last 2 years, analyst estimates of company earnings have
been cut continually over the period, suggesting that demand in much of the
economy continues to be sluggish. Also, bank lending to UK companies is still
declining, indicating that business leaders lack the confidence to invest for
growth. Hopefully this will come through in due course, and maybe we should
just be thankful that the worst of the financial crisis is now behind us.
The smaller companies sector continues to be a fertile ground for stock
pickers. The breadth of stocks available ensures that there are always
companies to buy that can offer the potential for significant returns. We
continue to seek fundamentally high quality businesses, with strong balance
sheets, high but defendable margins and the potential to grow into
significantly larger companies in the medium term. In many cases, due to the
increase in value of what we would consider to be lower quality stocks over the
past 12 months, it is still possible to buy genuinely great companies at very
little premium to the market. It is this area of the market which interests us
most. Whilst we have seen a distinct improvement in the UK economy over the
last 12 months, we believe that growth over the next few years could still
disappoint, relative to historic recoveries. This is due to the ongoing levels
of consumer and government indebtedness, unfavourable demographics and a weak
recovery in Europe, which is our largest trading partner. Buying high quality
businesses, which have demonstrated the ability to grow in a difficult economic
environment, rather than highly valued and at times lower quality "recovery"
stocks should reap its rewards over the next few years. Highly cash generative
businesses, which can re-invest their cash flow at high rates of return, offer
the greatest potential for long term investors, and it is these stocks which
will continue to be the focus of the portfolio.
Outlook
The beginning of 2014 has seen a continuation of last year's strong
performance, with the Numis Smaller Companies Index (ex Investment Companies)
rising 6.4% (total return to the end of February). There are however, potential
headwinds in 2014 - in the shape of reduced central bank stimulus, historically
high valuations and a new issue market that shows signs of overheating.
Nevertheless, with the economy on a sounder footing and the potential return of
M&A activity after the one of the quietest years on record, we remain
optimistic about further positive returns in the coming year.
Jonathan Brown Richard Smith,
Portfolio Managers
The Strategic Report was approved by the Board of Directors on 8 April 2014.
Invesco Asset Management Limited
Company Secretary
.
INVESTMENTS IN ORDER OF VALUATION
AT 31 JANUARY 2014
Ordinary shares unless stated otherwise
VALUE % OF
COMPANY ACTIVITY BY SECTOR £'000 PORTFOLIO
Synergy Health Health Care Equipment & 7,146 3.7
Services
Senior Aerospace & Defence 5,784 3.0
Howden Joinery Support Services 5,624 2.9
Diploma Support Services 4,154 2.2
Elementis Chemicals 3,714 1.9
RPS Support Services 3,674 1.9
CVS AIM General Retailers 3,658 1.9
Brown (N) General Retailers 3,645 1.9
Euromoney Institutional Media 3,624 1.9
Investor
Dechra Pharmaceuticals Pharmaceuticals & 3,613 1.9
Biotechnology
Top Ten Holdings 44,636 23.2
LSL Property Services Real Estate Investment & 3,598 1.9
Services
Ultra Electronics Aerospace & Defence 3,552 1.8
Mears Support Services 3,418 1.8
Marston's Travel & Leisure 3,278 1.7
RWS AIM Support Services 3,248 1.7
RPC General Industrials 3,085 1.6
Bovis Homes Household Goods & Home 3,059 1.6
Construction
Amerisur Resources AIM Oil & Gas Producers 2,913 1.5
Hunting Oil Equipment, Services & 2,785 1.4
Distribution
Rentokil Initial Support Services 2,769 1.4
Top Twenty Holdings 76,341 39.6
Innovation Software & Computer Services 2,680 1.4
Northgate Support Services 2,628 1.4
Micro Focus Software & Computer Services 2,474 1.3
International
PayPoint Support Services 2,427 1.3
Beazley Non-life Insurance 2,413 1.3
Essentra Support Services 2,407 1.2
Workspace Real Estate Investment Trusts 2,388 1.2
Aveva Software & Computer Services 2,347 1.2
Brewin Dolphin Financial Services 2,325 1.2
Dunelm General Retailers 2,317 1.2
Top Thirty Holdings 100,747 52.3
Consort Medical Health Care Equipment & 2,280 1.2
Services
Victrex Chemicals 2,246 1.2
Thomas Cook Travel & Leisure 2,167 1.1
Carphone Warehouse General Retailers 2,159 1.1
Betfair Travel & Leisure 2,137 1.1
Domino Printing Electronic & Electrical 2,058 1.1
Sciences Equipment
Vertu Motors AIM General Retailers 2,007 1.0
Dairy Crest Food Producers 1,967 1.0
EMISAIM Software & Computer Services 1,932 1.0
St. Modwen Properties Real Estate Investment & 1,897 1.0
Services
Top Forty Holdings 121,597 63.1
Go-Ahead Travel & Leisure 1,889 1.0
Guinness Peat Financial Services 1,867 1.0
Staffline AIM Support Services 1,821 0.9
Crest Nicholson Household Goods & Home 1,815 0.9
Construction
Premier Oil Oil & Gas Producers 1,758 0.9
Jupiter Fund Management Financial Services 1,756 0.9
Topps Tiles General Retailers 1,713 0.9
Bellway Household Goods & Home 1,708 0.9
Construction
Tungsten AIM Financial Services 1,640 0.8
Advanced Medical Health Care Equipment & 1,638 0.8
Solutions AIM Services
Top Fifty Holdings 139,202 72.1
Dignity General Retailers 1,625 0.8
Abcam AIM Pharmaceuticals & 1,607 0.8
Biotechnology
S&U Financial Services 1,571 0.8
Mountview Estates Real Estate Investment & 1,565 0.8
Services
Polar Capital AIM Financial Services 1,558 0.8
Sinclair IS Pharma AIM Pharmaceuticals & 1,521 0.8
Biotechnology
EnQuest Oil & Gas Producers 1,499 0.8
Xaar Electronic & Electrical 1,490 0.8
Equipment
Stanley Gibbons AIM General Retailers 1,489 0.8
Cranswick Food Producers 1,479 0.8
Top Sixty Holdings 154,606 80.1
Norcros Construction & Materials 1,438 0.7
Advanced Computer Software & Computer Services 1,427 0.7
Software AIM
Vectura Pharmaceuticals & 1,415 0.7
Biotechnology
Brooks Macdonald AIM Financial Services 1,413 0.7
Latchways Support Services 1,367 0.7
NewRiver Retail AIM Real Estate Investment Trusts 938} 0.7
NewRiver Retail AIM - Real Estate Investment Trusts 397}
Placing
Cape Oil Equipment, Services & 1,299 0.7
Distribution
Chemring Aerospace & Defence 1,293 0.7
EKF Diagnostics AIM Health Care Equipment & 1,282 0.7
Services
Fidessa Software & Computer Services 1,282 0.7
Top Seventy Holdings 168,157 87.1
Utilitywise AIM Support Services 1,241 0.6
JD Wetherspoon Travel & Leisure 1,197 0.6
Berendsen Support Services 1,175 0.6
WS Atkins Support Services 1,171 0.6
Kentz Oil Equipment, Services & 1,160 0.6
Distribution
Rathbone Brothers Financial Services 1,153 0.6
Electrocomponents Support Services 1,142 0.6
Servelec Software & Computer Services 1,116 0.6
Fenner Industrial Engineering 1,116 0.6
JD Sports Fashion General Retailers 1,057 0.5
Top Eighty Holdings 179,685 93.0
CLS Real Estate Investment & 1,043 0.5
Services
Domino's Pizza Travel & Leisure 1,036 0.5
Microgen Software & Computer Services 1,000 0.5
Catlin - US common Non-life Insurance 974 0.5
stock
Restaurant Group Travel & Leisure 966 0.5
International Personal Financial Services 869 0.4
Finance
Faroe Petroleum AIM Oil & Gas Producers 869 0.4
Renishaw Electronic & Electrical 770 0.4
Equipment
Sthree Support Services 763 0.4
Keywords Studios AIM Support Services 744 0.4
Top Ninety Holdings 188,719 97.5
Immunodiagnostic AIM Health Care Equipment & 723 0.4
Services
Hargreaves Services AIM Support Services 696 0.4
Telecom Plus Fixed Line Telecommunications 659 0.3
Anglo Pacific Mining 624 0.3
Games Workshop Leisure Goods 568 0.3
Perform Media 542 0.3
Trinity Exploration & Oil & Gas Producers 485 0.3
Production AIM
Brammer Support Services 378 0.2
Safestore Real Estate Investment & 67 -
Services
TOTAL INVESTMENTS 193,461 100.0
AIM Investments quoted on AIM (formerly the Alternative Investment Market)
.
STATEMENT OF DIRECTORS' RESPONSIBILITY
in respect of the preparation of the Annual Financial Report
The Directors are responsible for preparing the annual financial report in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under the law the Directors have elected to prepare financial
statements in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union. Under company law, the Directors must
not approve the financial statements unless they are satisfied that they give a
true and fair view of the state of affairs of the Company and of the profit or
loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgements and estimates that are reasonable and prudent;
- state whether applicable IFRSs have been followed, subject to any material
departures disclosed and explained in the financial statements; and
- prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the company will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of fraud
and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing the Strategic Report, a Corporate Governance Statement, a Directors'
Remuneration Report and a Directors' Report that comply with the law and
regulations.
In so far as each of the Directors is aware:
- there is no information, relevant to the audit, of which the Company's
auditor is unaware; and
- the Directors have taken all steps that they ought to have taken to make
themselves aware of any relevant audit information and to establish that
the auditors are aware of that information.
The Directors of the Company each confirm to the best of their knowledge, that:
- the financial statements, prepared in accordance with applicable accounting
standards, give a true and fair view of the assets, liabilities, financial
position and profit of the Company;
- this annual financial 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
- they consider that this annual financial report, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the Company's performance,business model and strategy.
Signed on behalf of the Board of Directors
Ian Barby
Chairman
8 April 2014
Electronic Publication
The annual financial report is published on www.invescoperpetual.co.uk/
investmenttrusts which is the Company's website maintained by the Company's
Manager. The work carried out by the Auditor did not involve consideration of
the maintenance and integrity of this website and accordingly, the Auditor
accepts no responsibility for any changes that have occurred to the financial
statements since they were initially presented on the website. Visitors to the
website need to be aware that legislation in the United Kingdom governing the
preparation and dissemination of the financial statements may differ from
legislation in other jurisdictions.
.
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 JANUARY
2014 2013
Notes Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Profits on - 43,806 43,806 - 25,353 25,353
investments held at
fair value
Losses on derivative - - - - (45) (45)
instruments
Income 2 4,555 - 4,555 4,123 - 4,123
Investment management 3 (567) (567) (1,134) (451) (451) (902)
fees
Other expenses (314) (4) (318) (290) (2) (292)
Profit before finance 3,674 43,235 46,909 3,382 24,855 28,237
costs and taxation
Finance costs (1) (5) (6) (7) (29) (36)
Profit before tax 3,673 43,230 46,903 3,375 24,826 28,201
Taxation - - - (5) - (5)
Profit after tax 3,673 43,230 46,903 3,370 24,826 28,196
Return per ordinary
share
  Basic 4 6.9p 81.2p 88.1p 6.3p 46.7p 53.0p
The total column of this statement represents the Company's statement of
comprehensive income, prepared in accordance with International Financial
Reporting Standards. The profit after tax is the total comprehensive income for
the year. The supplementary revenue and capital columns are both prepared in
accordance with the Statement of Recommended Practice issued by the Association
of Investment Companies. All items in the above statement derive from
continuing operations and the Company has no other gains or losses.
No operations were acquired or discontinued in the year.
.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 JANUARY
CAPITAL
SHARE SHARE REDEMPTION CAPITAL REVENUE
NOTES CAPITAL PREMIUM RESERVE RESERVE RESERVE TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
At 31 10,669 21,244 3,359 87,299 4,200 126,771
January
2012
Profit for - - - 24,826 3,370 28,196
the year
Shares (27) - 27 (278) - (278)
repurchased
and
cancelled
Dividends 5 - - - - (2,655) (2,655)
paid
At 31 10,642 21,244 3,386 111,847 4,915 152,034
January
2013
Profit for - - - 43,230 3,673 46,903
the year
Dividends 5 - - - - (3,188) (3,188)
paid
At 31 10,642 21,244 3,386 155,077 5,400 195,749
January
2014
The accompanying notes are an integral part of this statement.
.
BALANCE SHEET
AS AT 31 JANUARY
Notes 2014 2013
£'000 £'000
Non-current assets
  Investments held at fair value through 193,461 146,338
profit or loss
Current assets
  Other receivables 1,108 950
  Cash and cash equivalents 4,690 7,742
5,798 8,692
Total assets 199,259 155,030
Current liabilities
  Other payables (3,510) (2,996)
Net assets 195,749 152,034
Issued capital and reserves
Share capital 6 10,642 10,642
Share premium 21,244 21,244
Capital redemption reserve 3,386 3,386
Capital reserve 155,077 111,847
Revenue reserve 5,400 4,915
Total Shareholders' funds 195,749 152,034
Net asset value per ordinary share Basic 7 367.9p 285.7p
The financial statements were approved and authorised for issue by the Board of
Directors on 8 April 2014.
Signed on behalf of the Board of Directors
Ian Barby Richard Brooman
Chairman Deputy Chairman
The accompanying notes are an integral part of this statement.
.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 JANUARY
2014 2013
£'000 £'000
Cash flow from operating activities
Profit before tax 46,903 28,201
Taxation - (5)
Adjustments for:
  Purchases of investments (86,351) (33,823)
  Sales of investments 81,044 50,595
(5,307) 16,772
Profits on investments (43,806) (25,353)
Finance costs 6 36
Operating cash flows before movements in working (2,204) 19,651
capital
Increase in receivables (49) (62)
Increase/(decrease) in payables 24 (378)
Net cash flows from operating activities after tax (2,229) 19,211
Cash flows from financing activities
Interest paid (6) (36)
Shares repurchased and cancelled - (280)
Equity dividends paid - note 5 (3,188) (2,655)
Net cash used in financing activities (3,194) (2,971)
Net (decrease)/increase in cash and cash equivalents (5,423) 16,240
Cash and cash equivalents at the beginning of the 7,742 (8,498)
year
Cash and cash equivalents at the end of the year 2,319 7,742
Reconciliation of cash and cash equivalents to the
Balance Sheet is as follows:
2014 2013
£'000 £'000
Cash held at custodian - 102
STIC money market fund* 4,690 7,640
Bank overdraft (2,371) -
Cash and cash equivalents 2,319 7,742
* Short-Term Investment Company (Global Series) plc
The accompanying notes are an integral part of this statement.
.
NOTES TO THE FINANCIAL STATEMENTS
1. Principal Accounting Policies
(a) Basis of Preparation
(i) Accounting Standards applied
The financial statements have been prepared on an historical cost basis, except
for the measurement at fair value of investments and derivatives, and in
accordance with the applicable International Financial Reporting Standards
(IFRSs) and interpretations issued by the International Financial Reporting
Interpretations Committee as adopted by the European Union. The standards are
those endorsed by the European Union and effective at 31 January 2013.
Where presentational guidance set out in the Statement of Recommended Practice
(SORP) `Financial Statements of Investment Trust Companies and Venture Capital
Trusts', issued by the Association of Investment Companies in January 2009, is
consistent with the requirements of IFRSs, the Directors have sought to prepare
the financial statements on a basis compliant with the recommendations of the
SORP. The supplementary information which analyses the statement of
comprehensive income between items of a revenue and a capital nature is
presented in accordance with this.
(ii) Adoption of New and Revised Standards
New and revised standards and interpretations that became effective during the
year had no significant impact on the amounts reported in these financial
statements but may impact accounting for future transactions and arrangements.
At the date of authorising these financial statements, the following standards
and interpretations, which have not been applied in these financial statements,
were in issue but not yet effective (and in some cases had not yet been adopted
by the EU).
- IFRS 9: Financial Instruments (2013) (No mandatory effective date. Early
adoption is permitted for accounting periods starting on or after a date to be
announced, and this date will be after 1 January 2015).
- Mandatory Effective Date and Transition Disclosures - Amendments to IFRS 9
and IFRS 7 Financial Instruments: Disclosure (effective 1 January 2015 or when
IFRS 9 is first applied (see above)).
- IAS 32 Financial Instruments: Presentation - Amendments to application
guidance on the offsetting of financial assets and financial liabilities
(effective 1 January 2014).
- Amendments to IFRS10, IFRS 12 and IAS 27 (October 2012) - Investment
Entities(effective for accounting periods starting on or after 1 January 2014).
The Directors do not expect the adoption of the above standards and
interpretations (or any other standards and interpretations which are in issue
but not effective) will have a material impact on the financial statements of
the Company in future periods.
2. Income
This note shows the income generated from the portfolio (investment assets) of
the Company and income received from any other source.
2014 2013
£'000 £'000
Income from listed investments
UK dividends 3,453 3,540
UK unfranked investment income 36 76
Scrip dividend 206 -
Overseas dividends 273 188
Special dividends 587 319
Total income 4,555 4,123
Overseas dividends include dividends received on UK listed investments where
the investee company is domiciled outside of the UK.
3. Investment Management Fees
This note shows the fees due to the Manager. These are made up of the
management fee calculated and paid monthly and a performance fee calculated and
paid annually. Both are based on the value of the assets being managed.
2014 2013
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Base 567 567 1,134 451 451 902
management fee
567 567 1,134 451 451 902
Invesco Asset Management Limited (IAML) provides investment and administration
services to the Company. Details of the Investment Management Agreement can be
found in the Directors' Report on page 26 of the Annual Financial Report. No
performance fee was due for this year and the previous year. At 31 January
2014, £107,000 (2013: £81,000) was accrued in respect of the base management
fee.
4. Earnings per Ordinary Share
Return per share is the amount of gain generated for the financial year divided
by the weighted average number of ordinary shares in issue.
2014 2013
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
Basic 6.9p 81.2p 88.1p 6.3p 46.7p 53.0p
Basic total earnings per ordinary share is based on the net total profit for
the financial year of £46,903,000 (2013: £28,196,000).
Basic revenue earnings per ordinary share is based on the net revenue profit
for the financial year of £3,673,000 (2013: £3,370,000).
Basic capital earnings per ordinary share is based on the net capital profit
for the financial year of £43,230,000(2013: £24,826,000).
All three earnings are based on the weighted average number of shares in issue
during the year of 53,209,084 (2013: 53,217,249).
5. Dividends on Ordinary Shares
Dividends represent the return of income less expenses to shareholders. The
Company pays two dividends each year - an interim and a final dividend.
Dividends paid in the year: 2014 2013
pence £'000 pence £'000
Final paid in respect of 4.4 2,341 3.4 1,809
previous year
Interim paid 1.6 852 1.6 852
Return of unclaimed dividends - (5) - (6)
from previous years
6.0 3,188 5.0 2,655
Dividends payable in respect of
the year:
2014 2013
pence £'000 pence £'000
Interim 1.6 852 1.6 852
Final 4.9 2,607 4.4 2,341
6.5 3,459 6.0 3,193
The final dividend is based on shares in issue at the record date or, if the
record date has not been reached, on shares in issue on the date the balance
sheet is signed.
6. Share Capital
Share capital represents the total number of shares in issue, on which
dividends accrue.
2014 2013
NUMBER £'000 NUMBER £'000
Authorised:
Ordinary shares of 20p 160,000,000 32,000 160,000,000 32,000
each
Allotted, called-up and
fully paid:
Ordinary shares of 20p 53,209,084 10,642 53,209,084 10,642
each
During the year, the Company did not issue or repurchase any ordinary shares.
In the previous year, the Company repurchased and cancelled 137,000 ordinary
shares for a total consideration of £278,000.
7. Net Asset Value per Ordinary Share
The Company's total net assets (total assets less total liabilities) are often
termed shareholders' funds and are converted into net asset value per ordinary
share by dividing by the number of shares in issue.
The net asset value per share and the net asset values attributable at the year
end were as follows:
NET ASSET NET ASSETS
VALUE PER SHARE ATTRIBUTABLE
2014 2013 2014 2013
pence pence £'000 £'000
Ordinary shares - Basic 367.9 285.7 195,749 152,034
Net asset value per ordinary share is based on net assets at the year end and
on 53,209,084 (2013: 53,209,084) ordinary shares, being the number of ordinary
shares in issue at the year end.
8. Related Party Transactions and Transactions with the Manager
A related party is a company or individual who has direct or indirect control
or who has significant influence over the Company. Under accounting standards,
the Manager is not a related party.
Under International Financial Reporting Standards, the Company has identified
the Directors as related parties and Directors' fees and interests have been
disclosed in the Directors' Remuneration Report on pages 30 to 32 of the Annual
Financial Report. No other related parties have been identified.
Invesco Asset Management Limited (IAML), a wholly owned subsidiary of Invesco
Limited, acts as Manager, Company Secretary and Administrator to the Company.
Details of IAML's services and fees are disclosed in the Directors' Report.
This Annual Financial Report announcement is not the Company's statutory
accounts.
The statutory accounts for the year ended 31 January 2013 have been delivered
to the Registrar of Companies. The statutory accounts for the year ended 31
January 2013 received an audit report which was unqualified, did not include a
reference to any matters to which the auditors drew attention by way of
emphasis without qualifying the report, and did not include a statement under
either section 498(2) or 498(3) of the Companies Act 2006. The statutory
accounts for the financial year ended 31 January 2014 have been approved and
audited but have not yet been filed.
The Audited Annual Financial Report will be posted to shareholders shortly.
Copies may be obtained during normal business hours from the offices of Invesco
Perpetual, 6th Floor, Alban Gate, 125 London Wall, EC2Y 5AS.
A copy of the Annual Financial Report will be available from Invesco Perpetual
on the following website:
www.invescoperpetual.co.uk/investmenttrusts
The Annual General Meeting of the Company will be held at 12.00 noon on 5 June
2014 at 43-45 Portman Square, London, W1H 6LY.
By order of the Board
Invesco Asset Management Limited
Company Secretary
9 April 2014
End of announcement
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