Final Results
INVESCO Perpetual UK Smaller Companies Investment Trust plc
Preliminary Announcement of Final Results
for the year ended 31 January 2003
Chairman's Statement
It has been another very difficult year for equity investors; world
stockmarkets generally have now been in decline for three consecutive years.
This has happened only twice in the past 130 years. On its own, 2002 was the
worst year for global markets since 1974, and taken together, the last three
years represent the most severe bear market since the great depression of the
1930s. Despite these falls, the outlook remains deeply troubled, both from an
economic and geopolitical standpoint.
Against this extraordinarily testing background, your Company's Net Asset Value
(NAV) fell by 28.8% from 537.5p to 382.9p per share. This compares with a
decline in the Extended Hoare Govett Small Companies Index excluding investment
trusts (our prime benchmark) of 28.4%. Over the same period, the FTSE All Share
Index fell even more, by 31.0%. The Company's share price also fell, by 27.8%,
from 445.0p to 321.5p. The discount to NAV actually closed slightly, from 17.2%
to 16.0% at the year-end. At the time of writing, it stands at 21.2%.
Although the investment performance of the Company has been disappointing, it
is in line with our benchmark over the period, and our new investment manager
has made a number of strategic changes to the portfolio in the period. As you
will read in his more detailed report, he feels that the portfolio is now well
placed to benefit from any pick up in values. Furthermore, smaller companies
continue to offer better fundamental value than their larger counterparts.
Dividend policy
Your Board is seeking your approval for the payment of a final dividend of 5.5p
(2002: 6.5p) to be paid on 9 May 2003 to shareholders on the register on 4
April 2003. This dividend is, as you would expect, lower than that paid last
year, which is a reflection of more difficult market conditions generally. The
pursuit of dividend income continues to remain a secondary consideration for
the Company.
The Company's level of gearing has been modest throughout the year, ranging
between 16% and 5%. The current level of gearing is 5%, which is a reflection
of our generally cautious stance. We remain aware, however, that for many
investors, a key attraction of investment trusts lies in their ability to gear
the portfolio, and we will not overlook this upon any sign of a sustained
improvement in the market outlook.
Your directors
Bruce McIntosh will be retiring from your Board at the Annual General Meeting.
Bruce has served as a director of the Company since 1995. He has served us well
and I thank him, on your behalf, for his valuable contribution and wish him
well for the future.
Special business
I would like to draw your attention to some items of special business at the
forthcoming Annual General Meeting.
As in past years, your Board is seeking the renewal of its authority to allot
new ordinary shares of up to 5% of the issued share capital, whilst disapplying
pre-emption rights. Furthermore, the Directors are seeking the renewal of the
authority to purchase up to 14.99% of the Company's issued share capital, as
such buy-back powers can be a valuable tool, among others, to manage the
discount of the share price to NAV.
Outlook
Looking ahead, it is hard to see markets make much sustainable upward progress
until the economic and political clouds lift, and volatility is likely to
remain a nerve-wracking characteristic of markets for the foreseeable future.
As ever, careful stock selection will be paramount. I am confident that our
Manager has the long experience and steady hand necessary to guide us through
these difficulties.
Jamie Berry
Chairman
27 March 2003
Manager's Report
Investment Review
The year to January 2003 was a difficult one for all financial markets with
sentiment, at times, very poor. Concerns over corporate governance, accounting
irregularities, tensions with Iraq and questions about stability of some
financial institutions all undermined confidence. Relatively high valuations -
particularly in the US - also weighed on markets. Global economic growth was
generally of a `stuttering' nature, with growth in one period not following
through to the next. Deflationary forces were also prevalent, particularly in
sectors exposed to global competition.
The UK market, despite lower valuations and relatively better economic
fundamentals, was inevitably influenced by these developments. In particular,
the UK has suffered a compounded effect from the decline in equities as it has
affected the life insurance business and pension funds whose principal assets
include equities. Small companies outperformed their larger brethren and,
indeed, are modestly ahead for the three years to the end of February 2003,
which encompasses the bear market.
The overall performance of the Company for the period under review has been
disappointing and has lagged the benchmark index. Gearing, albeit modest, was
maintained at too high a level in view of the large market fall and accounts,
among other things, for the underperformance. The underlying performance of the
portfolio has therefore been satisfactory, particularly in view of the
substantial changes that have been made over the last six months. As the
Chairman points out in his Statement, one of the attractions of investment
trusts is their ability to gear. With more difficult markets in prospect, we
will continue to manage gearing actively.
Investment Strategy
In the Interim report, I reported that I had joined Invesco Perpetual in late
June 2002 and that my investment style is similar to that of my predecessors. I
look for companies that are growing; that have some unique characteristics or
that have some tangible advantage over their competitors; that have financial
strength; and whose share price valuation is reasonable in relation to the
quality and growth of the company. I also stated that I would expect to manage
the portfolio with a smaller number of holdings and a higher average market
capitalisation.
As at the year-end, many smaller capitalisation holdings had been sold and the
Trust had 152 investments. There may be a further modest reduction in the
number of holdings but we remain committed to running a broadly diversified
portfolio.
The structure of the portfolio has changed during the second half, not least as
a result of market movements. The Company remains overweight in construction
and building materials, a position that has been materially reduced through
sales, but partially offset by the strong performance of house building shares.
While commercial construction has become more difficult, infrastructure
spending remains buoyant on the back of government spending and demand for
housing remains strong apart from, perhaps, the South East. The overweight
position in defence related shares remains. Whatever the outcome of the current
situation with Iraq, defence spending is clearly rising in many countries. In
line with a generally more cautious attitude to the UK economy, there has been
greater focus on companies: that have more stable revenue sources; that are
financially strong (pension fund deficits have become an issue); and where the
shares offer an above average, sustainable dividend yield. To this end, there
have been increases in healthcare with new holdings including SSL International
and Care UK; in transportation with companies such as Arriva and Wincanton; and
in government outsourcing with the addition of Serco. Additionally, the decline
in the market has also produced opportunities to purchase good quality
companies whose shares were previously felt to be overvalued. Examples would
include Taylor & Francis and Taylor Nelson, both in the media sector, which
have been purchased after the year-end.
Company Risk Profile
The Company's objective is to achieve long-term capital growth by investing
predominantly in the shares of quoted UK smaller companies. Smaller companies'
shares tend to be moderately traded and, as such, the market in these shares
can at times prove illiquid. Shifts in investor sentiment, or the announcement
of new information, can result in significant movements in share prices, and
make dealing difficult. By investing in a broad range of companies, the Company
seeks to minimise so-called stock-specific risks.
Current Prospects
In retrospect, it is now clear that 2000 was the beginning of a more difficult
period for economies and financial markets, similar in some ways to the period
from the late1960s to the early 1980s. Then, higher inflation and interest
rates produced a series of short recessions and recoveries, with disappointing
growth overall. This was mirrored by a series of cyclical bull and bear markets
in the stock markets and overall returns were disappointing, particularly when
adjusted for inflation. Today, the US and UK economies are supported by
overstretched consumers and the German and Japanese economies are beset by
structural problems. Government finances, almost universally, are
deteriorating. The result is likely to be low growth, at best. However, stock
markets have been declining for three years, look oversold and must have, at
least partially, adjusted to the changed outlook. It does not seem
unreasonable, therefore, to expect a more sustained stock market rally to be
launched sometime in 2003. A signal that this might be about to take place
would be an ability for the market and individual shares to shrug off bad news,
unfortunately not seen so far. The present situation is further complicated by
the current tensions surrounding Iraq.
The outlook for smaller companies is intriguing. There is some evidence in the
past to suggest that smaller companies outperform during periods of economic
difficulty, reflecting perhaps their greater flexibility. This argument gains
some support from the surprisingly resilient relative performance of smaller
companies, so far, in this bear market. This also often coincides with a period
when smaller companies are relatively undervalued. Today, we believe that the
sector sells on a 20-30% discount rating to larger companies. However, the
outlook for the UK economy is becoming more uncertain and the prospects for
corporate profits seems particularly difficult in 2003, reflecting a series of
cost pressures such as National Insurance and pensions, to say nothing about
the potential for a slowdown in consumer spending. It therefore makes sense to
manage the portfolio, assuming the worst but hoping for the best. Good stock
selection, as ever, remains key and we continue to review all our holdings as
to their financial strength and their ability to endure, whatever the economic
circumstances.
The Investment Management Team
INVESCO Perpetual UK Smaller Companies Investment Trust plc ('the Company') is
managed by INVESCO Asset Management Limited ('INVESCO'). Day to day management
is the responsibility of the UK Equity Management team based in
Henley-on-Thames.
Investment Process
The prime investment objective of the Company is long-term capital growth
through investment in quoted investments drawn predominantly from the UK equity
markets. Investments will normally be in smaller companies. In implementing
this policy, the Manager generally selects stocks using a 'bottom up' approach.
This identifies individual companies, which the Manager believes to be well
run, and shows good potential for growth.
Management Agreement
The Manager was appointed under an agreement dated 14 November 2000 between the
Company and Perpetual Portfolio Management Limited ('PPML'), whereby PPML
provides investment management and secretarial services and carries on the
general administration of the Company. Under an agreement dated 12 December
2001, INVESCO has taken over the management with effect from 1 January 2002.
The agreement is terminable by either party upon expiry of not less than one
year's written notice.
Richard Smith
INVESCO Asset Management Limited
27 March 2003
Statement of Total Return (incorporating the revenue account)
for the year ended 31 January
2003 2002
Notes Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Losses on investments - (21,628) (21,628) - (10,541) (10,541)
Income 1 2,247 - 2,247 2,469 - 2,469
Investment management
Fee (810) - (810) (897) (669) (1,566)
Other expenses (212) - (212) (178) - (178)
Net return before
finance
costs and taxation 1,225 (21,628) (20,403) 1,394 (11,210) (9,816)
Interest payable
- bank overdraft (424) - (424) (485) - (485)
Return on ordinary
activities for
the financial year
before and
after tax 801 (21,628) (20,827) 909 (11,210) (10,301)
Dividends in respect
of
ordinary shares (766) - (766) (906) - (906)
Transfer to/(from) 35 (21,628) (21,593) 3 (11,210) (11,207)
reserves
Return per ordinary
share
Basic 5.8p (155.1)p (149.3)p 6.5p (80.0)p (73.5)p
The revenue 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.
Reconciliation of Movement in Shareholders' Funds
for the year ended 31 January
2003 2002
£'000 £'000
Revenue return for the year 35 3
Capital return for the year (21,628) (11,210)
Shares purchased for cancellation (324) --
Net movement in Shareholders' funds (21,917) (11,207)
Opening Shareholders' funds 75,266 86,473
Closing Shareholders' funds 53,349 75,266
Balance Sheet
as at 31 January
Notes 2003 2002
£'000 £'000
Fixed assets
Investments 56,752 87,256
Current assets
Debtors 699 646
699 646
Creditors: amounts falling due within one year 4,102 12,636
Net current liabilities 3,403 11,990
Net assets 53,349 75,266
Capital and reserves
Called-up share capital 13,933 14,003
Share premium account 21,244 21,244
Other reserves:
Capital redemption reserve 95 25
Capital reserves - realised 26,300 40,150
Capital reserves - unrealised (9,431) (1,329)
Revenue reserve 1,208 1,173
Equity shareholders' funds 53,349 75,266
Net asset value per ordinary share
Basic 3 382.9p 537.5p
Cash Flow Statement
for the year ended 31 January
2003 2002
Notes £'000 £'000
Cash inflow from operating activities 4(a) 541 1,294
Servicing of finance 4(b) (451) (501)
Taxation - 5
Capital expenditure and financial investment 4(b) 8,288 1,674
Equity dividends paid (906) (1,078)
Net cash inflow before management of liquid 7,472 1,394
resources and financing
Financing 4(b) (324) (104)
Increase in cash 7,148 1,290
Reconciliation of net cash flow to movement in
net debt
Increase in cash 7,148 1,290
Net debt at beginning of year (9,779) (11,069)
Net debt at end of year 4(c) (2,631) (9,779)
The accompanying notes are an integral part of this statement.
The financial information set out above does not constitute the Company's
statutory accounts for the year ended 31 January 2003 or 2002. The financial
information for 2002 is derived from the statutory accounts for 2002, which
have been delivered to the Registrar of Companies. The auditors have reported
on the 2002 statutory accounts and their report was unqualified and did not
contain a statement under s237(2) or (3) of the Companies Act 1985. The
statutory accounts for 2003 will be finalised on the basis of the information
presented by the Directors in this preliminary announcement and will be
delivered to the Registrar of Companies following the Company's Annual General
Meeting.
1. Income
2003 2002
£'000 £'000
Income from listed investments
UK dividends 2,223 2,440
UK unfranked investment income - interest 16 20
2,239 2,460
Other income
Deposit interest 2 4
Underwriting commission 6 5
8 9
Total income 2,247 2,469
Total income comprises:
Dividends 2,223 2,440
Interest 18 24
Other income 6 5
2,247 2,469
2. Taxation
The tax charge for the year is nil (2002: nil), as allowable expenses exceed
taxable income.
2003 2002
£'000 £'000
Revenue on ordinary activities before taxation 801 909
Theoretical tax at UK Corporation Tax rate of 30% 240 273
(2002: 30%)
Effects of:
- UK dividends which are not taxable (667) (732)
- Revenue account expenses in excess of taxable 427 459
income
Actual current tax amount - -
The Company is not taxable on capital gains.
Factors that may affect future tax charges
The Company has excess management expenses of £7,371,000 (2002: £5,947,000)
that are available to offset future taxable revenue. A deferred tax asset has
not been recognised in respect of these expenses, since they are recoverable
only to the extent that the Company has sufficient future taxable revenue.
3. Net asset value per ordinary share
The net asset value per ordinary share and the net assets attributable at the
year-end were as follows:
Net asset value per share Net assets attributable
2003 2002 2003 2002
pence pence £`000 £`000
Ordinary shares 382.9 537.5 53,349 75,266
4. Notes to the cash flow statement
(a) Reconciliation of operating profit to operating cash flows
2003 2002
£'000 £'000
Net revenue before finance costs and taxation 1,225 1,394
Decrease in debtors 79 38
(Decrease)/increase in creditors (763) 52
Investment management fee charged to capital - (188)
Tax on unfranked investment income - (2)
Net cash inflow from operating activities 541 1,294
(b) Analysis of cash flow for headings netted in the cash flow statement
2003 2002
£'000 £'000
Servicing of finance
Interest paid on overdrafts 451 501
451 501
2003 2002
£'000 £'000
Net financial investment
Purchase of investments (28,135) (30,796)
Sale of investments 36,423 32,470
8,288 1,674
2003 2002
£'000 £'000
Financing
Shares purchased for cancellation (324) (104)
(324) (104)
(c) Analysis of changes in net debt
1 February Cash flow 31January
2002 2003
£'000 £'000 £'000
Bank overdraft (9,779) 7,148 (2,631)
Net debt (9,779) 7,148 (2,631)
5. The Annual General Meeting of the Company will be held at 12.00noon on 8 May
2003 at 30 Finsbury Square,
London EC2A 1AG.
6. The Annual Report and Accounts for the year ended 31 January 2003 will be
available from the Registered Office shortly.
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