Half-yearly Report
Invesco Perpetual UK Smaller Companies Investment Trust plc
Half-Yearly Financial Report for the Six Months to 31 July 2010
KEY FACTS
Invesco Perpetual UK Smaller Companies Investment Trust plc (`the Company') is
an investment trust, quoted on the London Stock Exchange, which invests
predominantly in the shares of small to medium sized UK quoted companies.
Investment objectives of the Company
The Company aims to achieve long-term total return for its shareholders via an
investment vehicle which gives access to a broad cross section of small to
medium sized UK quoted companies.
Full details of the Company's investment policy and risk and investment limits
can be found in the annual financial report for the year ended 31 January 2010.
Performance Statistics
The Benchmark Index of the Company is the Extended Hoare Govett Smaller
Companies Index (excluding Investment Trusts).
AT AT %
31 JULY 31 JANUARY CHANGE
2010 2010
Total return (all income
reinvested) for
the six months ended 31 July
2010:
Net asset value* +5.5
Benchmark index* +7.2
FTSE All-Share index* +4.0
Net asset value and share price:
Net asset value per ordinary share
(1):
- balance sheet 201.2p 193.7p +3.9
- after charging proposed dividend 199.6p 191.0p +4.5
Mid-market price per ordinary share 162.0p 150.5p +7.6
Discount per ordinary share 19.5% 22.3%
Shareholders' funds (£'000) 114,912 111,281 +3.3
Capital return - Indices:
Benchmark* +5.6
FTSE All-Share Index* +2.1
*Source: Thomson Datastream and Morningstar
SIX MONTHS SIX MONTHS
ENDED ENDED
31 JULY 31 JULY
2010 2009
Return and dividend
per ordinary share:
Revenue return 2.5p 2.6p
Capital return 7.5p 18.1p
Total return 10.0p 20.7p
Interim dividend 1.6p 1.6p
AT AT AT
31 JULY 31 JANUARY 31 JULY
2010 2010 2009
Gearing
Actual gearing(2) 100 100 100
Potential gearing(3) 117 118 127
Asset gearing(4) 94 98 99
(1) Includes enhancements from share repurchases.
(2) Actual gearing reflects the amount of loans already arranged and in use by
the Company. It is calculated by dividing the aggregate of shareholders' funds
and all drawdown loans by shareholders' funds. A gearing level of 100 indicates
there is no gearing.
(3) Potential gearing is the amount currently available for the Company to use
by way of loans already arranged. It is based on the lower of 30% of net asset
value and £20 million (31 July 2009: £25 million).
(4) Asset gearing reflects the amount of loans actively invested in assets and
not held in cash. It is calculated by dividing fixed asset investments by
shareholders' funds.
Chairman's Statement incorporating the interim management report
Chairman's Statement
During the six months under review, the Company achieved an increase in net
asset value of 5.5% on a total return basis, out-performing the FTSE All-Share
Index, which rose by 4.0% over the same period. It under-performed, however,
the benchmark Extended Hoare Govett Smaller Companies Index (excluding
Investment Trusts), which rose by 7.2%.
This under-performance against the benchmark was partly attributable to an
over-exposure to service-based businesses that are dependent on revenues from
out-sourcing from the public sector to the private sector. During the period,
the ratings of these businesses have been adversely affected in the short-term
by the news that the Coalition Government intends to reduce spending
significantly, with an implied negative effect on such companies. The Managers,
however, continue to believe that the sector will, in due course, benefit from
an inevitable increase of out-sourcing of Government activities to the private
sector.
I am pleased to note that the mid-market price of the Company's shares rose
during the period from 150.5p to 162.0p per share and the discount narrowed
from 22.3% at the beginning of the period to 19.5% as at 31 July 2010.
Share Buy Backs
During this six month period, the Company bought back and cancelled 355,000
ordinary shares at an average price of 153p per share and at an average
discount to NAV of 21.2%, enhancing the NAV per share by 0.13%.
Interim Dividend
The Board is pleased to declare an interim dividend of 1.6p per share to be
paid on 22 October 2010 to shareholders on the register on 24 September 2010.
This is the same level as the interim dividend paid in respect of the year
ended 31 January 2009, as well as that of the first interim dividend paid in
respect of the year ended 31 January 2010.
Appointment of a Co-Portfolio Manager
On 21 May 2010 the Board appointed Jonathan Brown as portfolio co-manager of
your Company, alongside the existing manager, Richard Smith. Jonathan has been
at Invesco Perpetual for over ten years and has managed UK smaller company
portfolios for the last five years, covering the same investment universe as
that of the Company. He has worked with Richard for a substantial period and
their investment styles are compatible. My fellow Directors and I know him well
and appreciate the work he has done on a day-to-day basis with Richard and our
appointment reflects our considerable confidence in his abilities.
Outlook
As I highlighted in my statement in the Annual Financial Report, there will
always be periods in which the market does not suit the investment style of
particular portfolio managers. The Company's managers have stayed true to their
preference for high quality companies with solid balance sheets, little or no
gearing and high market share. In such volatile and unpredictable markets, such
a defensive approach should benefit shareholders over the medium to longer term
but may suffer in the shorter term as any good economic news is often
translated into support for over-geared, cyclical companies of the type that
the Managers believe have no place in this Company's portfolio. The Board
remains supportive of the Managers' strategy and investment style and continues
to believe that this will benefit shareholders over the long-term.
Ian Barby
Chairman
16 September 2010
Investment Managers' Report
Investment Review
The six months under review have been characterised by a higher than usual
level of uncertainty in the UK investment markets. Firstly, there was the
sovereign debt crisis, involving many smaller European economies, notably
Greece, which resulted in widespread cuts in government spending across the
continent. Then in May, following an indecisive general election result, a
coalition government was formed in the UK, the first since the Second World
War. Today, investors are anxiously awaiting the comprehensive spending review
scheduled for October.
Not surprisingly, particularly after the strong rise in the preceding 12
months, the UK stock market has been subject to profit-taking, with the FTSE
All Share, falling at one point by 17% from its April high, though a subsequent
recovery resulted in a net 4.0% gain (on a total return basis) over the whole
period under review. Smaller companies, as measured by the Extended Hoare
Govett Smaller Companies Index (ex investment trusts), outperformed, rising
7.2%, on a total return basis.
Against this background, your Company produced an increase in net asset value
of 5.5% (on a total return basis) for the half-year. Whilst there have been
individual, company specific problems, notably Mouchel and Connaught, the more
general reason for the relative underperformance was an over-exposure to
companies that had some dependence on revenues from government-related
contracts. We had anticipated, and still do, that these service-based
businesses will benefit from an increased outsourcing of government activities
to the private sector. The market, however, has chosen to focus on the risk of
cuts in spending on existing contracts and this has led to sharp drops in their
ratings. At the same time, the portfolio benefited from being underweight in
consumer-facing sectors, such as retailing, travel and leisure and
housebuilders but was negatively impacted by overweight positions in
healthcare, software and support services. At a company level, there were
strong contributions from Croda, a specialty chemicals business focused on the
personal care market, and VT Group, a defence services business acquired by
Babcock International.
Investment and Portfolio Strategy
The application of £200 billion of quantitative easing and record low base
rates of 0.5% finally had the desired effect in the first quarter of 2010, with
the UK economy beginning to return to growth. Despite the severity of the
recession, however, the overwhelming impression is one of unfinished business.
The principal underlying causes of the recession were the over-indebtedness and
overspending by both the consumer and by government. Both problems can only be
tackled with a long-term perspective, as can the principal global issues of the
US budget deficit and the Chinese trade surplus.
While unemployment in the UK did not reach as high a level as expected, partly
reflecting salary sacrifice by company employees for the common good, labour
militancy is increasing and with the government about to start shedding public
sector employees as part of its austerity programme, unemployment looks set to
rise to higher levels. This will inevitably adversely affect consumer spending,
which has been surprisingly resilient so far. At the same time, housing prices
have started to slip and car sales are suffering, following the removal of the
government incentive program.
Much of the growth in the UK economy during the previous Labour administration
took place in the public sector and was financed by debt. This is now being
reversed by the coalition government which recognises that it needs to move
quickly so as to produce some positive momentum by the time of the next
election. The UK economy, therefore, faces the not insignificant headwinds of
rising taxes, sluggish consumer spending, higher unemployment and falling
government expenditure. The main positive factor supporting the economy is the
easy money policy being pursued by the Bank of England, and another round of
quantitative easing seems quite likely.
On a more positive note, the outlook for the UK stock market seems more
promising than that of the UK economy. Share prices should benefit from a
continuing low level of interest rates, as many public companies are soundly
financed and produce dividend yields well in excess of bank deposit rates.
Moreover, well over 60% of earnings of UK public companies come from abroad.
Whilst much of these come from Europe, where the outlook is judged to be no
better than the UK, an increasing amount also comes from emerging countries
where the prospects are more encouraging. Additionally, the constant shift from
equities to bonds by pension funds and life insurance companies has pushed
government bond yields to very low levels and left UK equities looking
attractively valued on an historical basis. The recent pick-up in corporate
activity is also supportive. Finally, if the coalition government's fiscal
policies are to be successful, it implies the freeing up of resources for the
private sector, as well as the benefits to be derived from the outsourcing of
government services.
As ever, your Company will hold a diversified portfolio of profitable,
well-established, quality companies with an emphasis on strong balance sheets
and recurring revenue. In the short term and particularly before the
comprehensive spending review in October, however, stock selection is
challenging. The shares of quality, problem-free, growing companies have been
re-rated upwards but may go further. However, the rest of the market would
appear to be undervalued, as it is suffering from uncertainties related to
government policies and to the prospects for consumer spending. The greatest
opportunity would still seem to lie with the public sector use of outsourcing
companies (even though exposure to these hurt the portfolio in the first half),
as well as in healthcare, which should benefit from demographic drivers and
burgeoning healthcare spend in emerging markets.
Outlook
Despite the return to growth, the UK economy still faces significant headwinds.
Consumer and government spending account for 70% of the economy, so that growth
is likely to remain anaemic at best and a double dip back into recession cannot
be ruled out. On a positive note, monetary policy is likely to remain
accommodative and interest rates low for some time to come. Indeed, in
extremis, a resumption of quantitative easing is quite likely. Given the cheap
valuation of many large and small companies, we would hope for a resumption of
rising markets before the end of this year and stretching into 2011.
Richard Smith
Investment Manager
Jonathan Brown
Investment Manager
Related Party
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 arrangements are given in the annual
financial report which is available on the Company's website.
Principal Risks and Uncertainties
The principal risks and uncertainties that could affect the Company's business
can be divided into the following areas:
- Investment Objective;
- Market Movements and Portfolio Performance;
- Ordinary Shares; and
- Regulatory and Tax Related.
A detailed explanation of these principal risks and uncertainties can be found
on pages 22 and 23 of the latest published annual financial report which is
available on the Company's website.
In the view of the Board, these principal risks and uncertainties are equally
applicable to the remaining six months of the financial year as they were to
the six months under review.
Going Concern
The financial statements have been prepared on a going concern basis. The
Directors consider this is the appropriate basis as the Company has adequate
resources to continue in operational existence for the foreseeable future. In
considering this, the Directors took into account the diversified portfolio of
readily realisable securities which can be used to meet funding commitments,
and the ability of the Company to meet all of its liabilities and ongoing
expenses from its assets.
DIRECTORS' RESPONSIBILITY STATEMENT
in respect of the preparation of the half-yearly financial report.
The Directors are responsible for preparing the half-yearly financial report
using accounting policies consistent with applicable law and International
Financial Reporting Standards.
The Directors confirm that to the best of their knowledge:
* the condensed set of financial statements contained within the half-yearly
financial report have been prepared in accordance with the International
Accounting Standards 34 `Interim Financial Reporting';
* the interim management report includes a fair review of the information
required by 4.2.7R and 4.2.8R of the FSA's Disclosure and Transparency
Rules; and
* the interim management report includes a fair review of the information
required on related party transactions.
The half-yearly financial report has not been audited or reviewed by the
Company's auditors.
Signed on behalf of the Board of Directors.
Ian Barby
Chairman
16 September 2010
THIRTY LARGEST HOLDINGS AT 31 JULY 2010
Ordinary shares unless stated otherwise
COMPANY ACTIVITY BY SECTOR VALUE % OF
£'000 PORTFOLIO
Synergy Healthcare Health Care Equipment & 4,642 4.3
Services
Chemring Aerospace & Defence 3,737 3.5
Fenner Industrial Engineering 3,535 3.3
Croda Chemicals 3,339 3.1
Babcock Support Services 3,311 3.1
Dignity General Retailers 2,252 2.1
Domino Printing Electronic & Electrical 2,206 2.0
Equipment
Homeserve Support Services 2,065 1.9
Premier Oil Oil & Gas Producers 1,810 1.7
Xchanging Support Services 1,741 1.6
Diploma Support Services 1,721 1.6
Dechra Pharmaceuticals Pharmaceuticals & 1,662 1.6
Biotechnology
Mears Support Services 1,610 1.5
Melrose Industrial Engineering 1,512 1.4
Brown (N) General Retailers 1,452 1.3
Victrex Chemicals 1,443 1.3
Fidessa Software & Computer 1,397 1.3
Services
RM Software & Computer 1,314 1.2
Services
Beazley Non-life Insurance 1,289 1.2
Ultra Electronic Aerospace & Defence 1,264 1.2
Spirax-Sarco Industrial Engineering 1,230 1.1
Engineering
Rotork Industrial Engineering 1,208 1.1
Micro Focus Software & Computer 1,197 1.1
Services
Serco Support Services 1,195 1.1
SDL Software & Computer 1,182 1.1
Services
Datacash Support Services 1,173 1.1
James Halstead Construction & Materials 1,166 1.1
Davis Service Support Services 1,145 1.1
Filtrona Support Services 1,135 1.1
PZ Cussons Personal Goods 1,122 1.0
55,055 51.1
Other Investments (86) 52,677 48.9
Total Investments (116) 107,732 100.0
CONDENSED STATEMENT OF COMPREHENSIVE INCOME
SIX MONTHS TO 31 JULY SIX MONTHS TO 31 JULY YEAR
2010 2009
ENDED
31
JANUARY
2010
Revenue Capital Total Revenue Capital Total Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains on investments
held at fair value - 4,485 4,485 - 10,604 10,604 28,704
through profit or loss
Income
UK dividends 1,614 - 1,614 1,488 - 1,488 2,670
Overseas dividends 111 - 111 30 - 30 136
Deposit interest - - - 22 - 22 -
Underwriting 1 - 1 7 - 7 11
commission
Interest on VAT - - - 92 - 92 92
recoverable
Gross return 1,726 4,485 6,211 1,639 10,604 12,243 31,613
Investment management (177) (177) (354) (133) (133) (266) (616)
fee - note 2
VAT recoverable on - - - 159 - 159 276
management fees
Other expenses (132) - (132) (171) (1) (172) (313)
Net return before 1,417 4,308 5,725 1,494 10,470 11,964 30,960
finance costs and
taxation
Finance costs - note 2 - - - - - - -
Return on ordinary 1,417 4,308 5,725 1,494 10,470 11,964 30,960
activities before tax
Taxation - - - (2) - (2) (2)
Return after tax 1,417 4,308 5,725 1,492 10,470 11,962 30,958
Return per ordinary 2.5p 7.5p 10.0p 2.6p 18.1p 20.7p 53.7p
share
Basic - note 3
The total column of this statement represents the Company's Income Statement,
prepared in accordance with International Financial Reporting Standards. The
supplementary revenue and capital columns are presented 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 period.
CONDENSED BALANCE SHEET
Registered number 2129187 AT AT AT
31 JUL 31 JUL 31 JAN
2010 2009 2010
£'000 £'000 £'000
Non-current assets
Investments held at fair value 107,732 92,287 108,892
through profit or loss
Current assets
Amounts due from brokers 111 237 436
Prepayments and accrued 213 329 238
income
Cash and cash equivalents 7,207 1,374 1,939
7,531 1,940 2,613
Total assets 115,263 94,227 111,505
Current liabilities
Amounts due to brokers (74) (556) (104)
Accruals (277) (103) (120)
(351) (659) (224)
Net assets 114,912 93,568 111,281
Issued capital and reserves
attributable to equity holders
Share capital 11,421 11,539 11,492
Share premium 21,244 21,244 21,244
Other reserves:
Capital redemption reserve 2,607 2,489 2,536
Capital reserve 75,928 54,513 72,165
Revenue reserve 3,712 3,783 3,844
Total Shareholders' funds 114,912 93,568 111,281
Net asset value per ordinary
share
Basic - see note 5 201.2p 162.2p 193.7p
CONDENSED STATEMENT OF CASH FLOW
SIX MONTHS SIX MONTHS YEAR
TO TO TO
31 JUL 31 JUL 31 JAN
2010 2009 2010
£'000 £'000 £'000
Cash flow from operating
activities
Profit before tax 5,725 11,964 30,960
Taxation - (2) (2)
Adjustments for:
Purchases of investments (8,820) (15,091) (29,822)
Sales of investments 14,760 12,415 27,991
5,940 (2,676) (1,831)
Gains on investments (4,485) (10,604) (28,704)
Operating cash flows before 7,180 (1,318) 423
movements in working capital
Decrease in receivables 25 1,134 1,225
Decrease in payables (20) (1,292) (1,276)
Net cash flows from operating 7,185 (1,476) 372
activities after tax
Cash flow from financing
activities
Buy back of shares (368) (608) (967)
Equity dividends (1,549) (2,134) (3,058)
Net cash used in financing (1,917) (2,742) (4,025)
activities
Net increase/(decrease) in cash 5,268 (4,218) (3,653)
and cash equivalents
Cash and cash equivalents at the 1,939 5,592 5,592
beginning of period
Cash and cash equivalents at 7,207 1,374 1,939
the period end
CONDENSED STATEMENT OF CHANGES IN EQUITY
SHARE SHARE CAPITAL CAPITAL REVENUE TOTAL
CAPITAL PREMIUM REDEMPTION RESERVE RESERVE £'000
£'000 £'000 RESERVE £'000 £'000
£'000
For the year ended 31
January 2010
At 31 January 2009 11,656 21,244 2,372 44,651 4,425 84,348
Shares bought back and (164) - 164 (967) - (967)
cancelled
Profit for the year - - - 28,481 2,477 30,958
Dividends paid - - - - (3,058) (3,058)
At 31 January 2010 11,492 21,244 2,536 72,165 3,844 111,281
For the six months ended
31 July 2010
Shares bought back and (71) - 71 (545) - (545)
cancelled
Profit for the period - - - 4,308 1,417 5,725
Dividends paid - - - - (1,549) (1,549)
At 31 July 2010 11,421 21,244 2,607 75,928 3,712 114,912
For the six months ended
31 July 2009
At 31 January 2009 11,656 21,244 2,372 44,651 4,425 84,348
Shares bought back and (117) - 117 (608) - (608)
cancelled
Profit for the period - - - 10,470 1,492 11,962
Dividends paid - - - - (2,134) (2,134)
At 31 July 2009 11,539 21,244 2,489 54,513 3,783 93,568
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. Basis of Preparation
Accounting Standards and Policies
These condensed financial statements have been prepared using the same
accounting policies as those adopted in the 2010 annual financial report, which
are consistent with International Financial Reporting Standards (`IFRS'), and
Standing Interpretation Committee and International Financial Reporting
Interpretation Committee interpretations issued by the International Accounting
Standards Board to the extent adopted by the EU.
2. Management Performance Fees and Finance Costs
The investment management fee is allocated 50% to revenue and 50% to capital;
finance costs are allocated 20% to revenue and 80% to capital.
Performance-related fees are charged wholly to capital, and no
performance-related fees arose in the periods reported on.
3. Basis of Returns
SIX MONTHS SIX MONTHS YEAR
TO TO TO
31 JUL 31 JUL 31 JAN
2010 2009 2010
£ £ £
Returns after
tax:
Revenue 1,417,000 1,492,000 2,477,000
Capital 4,308,000 10,470,000 28,481,000
Total 5,725,000 11,962,000 30,958,000
Weighted average 57,336,480 57,761,038 57,671,287
number of
ordinary
shares in
issue
during the
period
4. Dividends on Ordinary Shares
FOR THE RATE SIX MONTHS SIX MONTHS YEAR
YEAR ENDED ENDED ENDED ENDED
31 JAN 31 JUL 31 JUL 31 JAN
2010 2009 2010
£'000 £'000 £'000
Final 2009 2.5p - 1,443 1,443
Special 2009 1.2p - 692 692
First 2010 1.6p - - 923
interim
Second 2010 2.7p 1,549 - -
interim
Dividends 1,549 2,135 3,058
paid
An interim dividend of 1.6p per ordinary share (2009: 1.6p) will be paid on 22
October 2010 to shareholders on the register on 24 September 2010.
5. Basis of Net Asset Value per Ordinary Share
AT 31 JUL AT 31 JUL AT 31 JAN
2010 2009 2010
Shareholders' £114,912,000 £93,568,000 £111,281,000
funds
Ordinary shares 57,104,629 57,694,629 57,459,629
in
issue at period
end
6. Movements in Share Capital
SIX MONTHS SIX MONTHS YEAR
TO 31 JUL TO 31 JUL TO 31 JAN
2010 2009 2010
Number of
ordinary
20p shares:
Brought forward 57,459,629 58,279,629 58,279,629
Buy backs in (355,000) (585,000) (820,000)
period
In issue at 57,104,629 57,694,629 57,459,629
period end
The average share price of shares bought back in the six months to 31 July 2010
was 153p.
7. VAT
As reported in the 2010 annual financial report, VAT recovered on management
fees paid by the Company has been credited to revenue and capital, in the same
proportions as originally charged to the income and capital accounts.
8. Investment Trust Status
It is the intention of the Directors to conduct the affairs of the Company so
that it satisfies the conditions for approval as an investment trust company
set out in section 1158 of the Corporation Tax Act 2010 (formerly s842 of the
Income and Corporation Taxes Act 1988).
9. Status of Half-Yearly Financial Report
The financial information contained in this half-yearly financial report, which
has not been reviewed or audited by the independent auditors, does not
constitute statutory accounts within the meaning of section 434 of the
Companies Act 2006. The financial information for the half years ended 31 July
2009 and 31 July 2010 has not been audited. The figures and financial
information for the year ended 31 January 2010 are extracted and abridged from
the latest published accounts and do not constitute the statutory accounts for
that year. Those accounts have been delivered to the Registrar of Companies and
include the Report of the Independent Auditors, which was unqualified.
By order of the Board
Invesco Asset Management Limited
Company Secretary
16 September 2010
www.invescoperpetual.co.uk/investmenttrusts
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