Interim Results
INVESCO Perpetual UK Smaller Companies Investment Trust plc
Unaudited Preliminary Announcement of Interim Results
Chairman's statement
Against a backdrop of a somewhat directionless market for UK smaller companies,
I am pleased to report a modest improvement in the net asset value of your
company.
In the six months ended 31 July 2004, the Net Asset Value increased by 2.6%,
which compares favourably with a decline in our benchmark index* of 0.7%.
Pleasingly, the share price advanced slightly quicker than Net Asset Value,
rising by 3.1% over the same period, so that the discount to net assets
narrowed slightly to 18.7%; this is broadly in line with the sector average.
In your Manager's report, you will find a more detailed analysis of the period,
together with some comments about the future outlook. In summary, we remain
optimistic about the ability of smaller companies to cope with the uncertain
environment that lies ahead. Your Manager continues to run a balanced and well
diversified portfolio, which is capable of producing satisfactory returns in
what may continue to be a rather lacklustre stockmarket.
During the last six months we have been in active dialogue about investment
management fees with the Company's investment managers, INVESCO Asset
Management Limited. I am pleased to report that with effect from 1 August 2004,
we have secured a lower base investment management fee arrangement, from an
average fee rate of 0.89%, for the first six months of the year, to 0.65%. This
is coupled with a performance fee, which greater motivates your Manager. I
believe that these new arrangements more closely align the interests of our
shareholders and the investment manager.
Jamie Berry
Chairman
29 September 2004
* Extended Hoare Govett Smaller Companies Index (capital gains excluding
investment trusts)
Manager's Report
Investment review
The six months under review have proved to be a lacklustre time for the UK
stockmarket. The typical seasonal rally peaked in April and the subsequent fall
has left the market virtually unchanged for the period. Early optimism began to
fade against a background of record oil prices and rising interest rates.
Smaller companies have largely followed the market, peaking in March and
falling back to record a small loss of 0.7%, as measured by benchmark index for
the period. The feature has been the strength of oil companies. In particular
Cairn Energy alone has contributed + 1.1% to the Index's overall performance
and has become by far the largest constituent.
The overall performance of the Trust is judged to be satisfactory in the first
half, having produced a positive return and finishing ahead of the benchmark
index despite not having a holding in Cairn Energy. Gearing levels have been
and remain modest, consistent with the relatively cautious view of the UK
stockmarket and economy we have had during the period.
Investment Strategy
The UK economy has shown continuous growth over the last 12 years. This has
been fuelled principally by consumer spending, financed in part by mortgage
equity withdrawal but also by a straightforward increase in debt. This has
resulted in record levels of consumer borrowing. Now the combination of higher
taxes, higher utility bills and rising interest rates is putting pressure on
disposable income. This, in turn, is beginning to lead to some hesitancy in the
housing markets which could begin to affect sentiment. Our central forecast is
that consumer spending is entering an extended period of sluggish growth as the
consumer seeks to reduce his borrowing. We do not, however, expect a major
reduction in consumer expenditure since unemployment, interest rates and
inflation are likely to remain at historically low levels.
Government spending has also been a major stimulus to the UK economy in recent
years as the Government has sought to bolster public services. To put this into
perspective, government spending is currently growing in real terms at over
twice the rate that it did during the 1990s. The budget deficit will exceed 3%
of GDP which is high considering the strength of the economy. Government
spending has now started to slow and this should continue as the political
debate moves onto how to get best value from public expenditure. Employment in
the public sector, which has grown strongly in the last few years, may also
start to decline as the Government undertakes rationalisation of the civil
service.
With consumer and government spending accounting for about 90% of the economy,
the overall economy looks set for a period of slow growth. Indeed this is
precisely what the actions of the MPC are designed to encourage. The problem
for the corporate sector is that it is going to come at a time of growing cost
pressures. Wage and pension costs, energy and raw material costs, local taxes
and property costs are all rising steadily and companies will have to deal with
these in an environment of slowing volume growth. In addition, many companies
with overseas activities are being hampered by the strength of sterling. As a
result, the outlook for the growth in corporate profits is modest, at best.
With such a background, we continue to want to run a portfolio of quality
companies, with a growing emphasis on those that are less sensitive to the UK
economy. We also recognise that dividend income will be an important part of
the return available from equities. The Trust is overweight in sectors such as
healthcare, water and gas utilities and construction and support services,
areas which are more stable than the general economy. However even supposedly
vulnerable areas can offer opportunities but the investment case must rest on
factors other than the economy. Many housebuilders, for example, sell at a
significant discount to their underlying assets which could prompt corporate
action if the shares were to fall too far. The Trust remains modestly
overweight in housebuilders but underweight in retailers and leisure companies,
sectors that would suffer from a consumer slowdown.
Current Prospects
While there is an obvious link between the stockmarket and the economy, we find
ourselves being somewhat less negative about the stockmarket. Despite the
lacklustre outlook for corporate profits, equities are reasonably priced and
dividend yields are competitive versus deposit accounts and bonds. Moreover,
corporate balance sheets have recovered significantly, to the point where share
repurchase programmes could offset the selling from life and pension funds.
Should the current weakness of the UK stockmarket persist, we would consider
increasing the gearing of the Trust.
The valuation disparity between small and large companies has now been closed.
However, we firmly believe that small companies have the flexibility to handle
the more difficult economic environment that we see ahead. We therefore expect
small companies to sell on a premium rating but a catalyst for this to happen
would be a reduction in the size of corporate fundraisings from that which
acted as such a restraint to small companies during the first half of 2004.
Richard Smith
Investment Manager - Small Companies Team
INVESCO Asset Management Limited
29 September 2004
Statement of Total Return
(Incorporating the Revenue Account)
Six months to 31 July 2004
(Unaudited)
Revenue Capital Total
£'000 £'000 £'000
Gains/(losses) on investments - - 4,170 4,170
realised
- unrealised - (2,730) (2,730)
Income
UK dividends 1,336 - 1,336
Interest and underwriting 1 - 1
commisson
Gross return 1,337 1,440 2,777
Investment management fee (453) - (453)
Other expenses (133) - (133)
Net return before finance costs and 751 1,440 2,191
taxation
Interest payable and similar charges (73) - (73)
Return on ordinary activities before 678 1,440 2,118
and after taxation
Dividend in respect of equity shares - - -
Transfer to reserves 678 1,440 2,118
Basic return per ordinary share - 4.9p 10.3p 15.2p
note 1
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
period.
Statement of Total Return
(Incorporating the Revenue Account)
Year to
31
January
Six months to 31 July 2004
2003
(Unaudited) (Audited)
Revenue Capital Total Total
£'000 £'000 £'000 £'000
(Losses)/Gains
on investments - realised - (2,419) (2,419) 3,629
- unrealised - 20,001 20,001 23,079
Income
UK dividends 1,126 - 1,126 2,124
Interest and underwriting 3 - 3 3
commission
Gross return 1,129 17,582 18,711 28,835
Investment management fee (356) - (356) (784)
Other expenses (104) - (104) (219)
Net return before finance 669 17,582 18,251 27,832
costs and taxation
Interest payable and similar (61) - (61) (149)
charges
Return on ordinary 608 17,582 18,190 27,683
activities before and after
taxation
Dividends in respect of - - - (836)
equity shares
Transfer to reserves 608 17,582 18,190 26,847
Basic return per ordinary 4.4p 126.2p 130.6p 198.7p
share - note 1
Balance Sheet
At At At
31 July 31 January 31 July
2004 2004 2003
(Unaudited) (Audited) (Unaudited)
£'000 £'000 £'000
Fixed Assets
Investments 85,268 85,041 75,781
Current assets
Amounts due from brokers 192 350 155
Prepayments and accrued 282 95 237
income
474 445 392
Creditors: amounts falling due
within one year
Bank overdraft and (3,173) (4,231) (4,184)
short-term loans
Amounts due to brokers (139) (86) (338)
Accruals and deferred income (116) (137) (112)
Proposed dividends - (836) -
(3,428) (5,290) (4,634)
Net current liabilities (2,954) (4,845) (4,242)
Total assets less current 82,314 80,196 71,539
liabilities
Capital and reserves
Called up share capital 13,933 13,933 13,933
Share premium account 21,244 21,244 21,244
Capital redemption reserve 95 95 95
Other reserves:
Capital reserve - realised 29,561 25,391 23,881
Capital reserve - unrealised 15,456 18,186 10,570
Revenue reserve 2,025 1,347 1,816
Equity Shareholders' funds 82,314 80,196 71,539
Net asset value per ordinary
share - note 2
Basic 590.8p 575.6p 513.4p
Cash Flow Statement
Six months Year to Six months
to 31 July 31 to 31 July
January
2004 2004 2003
(Unaudited) (Audited) (Unaudited)
£'000 £'000 £'000
Cash inflow from operating 546 1,194 578
activities
Returns on investments and (76) (144) (62)
servicing of finance
Capital expenditure and
financial investment
Purchase of investments (13,581) (29,849) (14,372)
Sale of investments 15,005 27,965 13,069
Equity dividends paid (836) (766) (766)
Increase/(decrease) in cash 1,058 (1,600) (1,553)
Net debt at beginning of the (4,231) (2,631) (2,631)
period
Net debt at end of period (3,173) (4,231) (4,184)
Reconciliation of Movement in Shareholders' Funds
Six months Year to Six months
to 31 July 31 to 31 July
January
2004 2004 2003
(Unaudited) (Audited) (Unaudited)
£'000 £'000 £'000
Revenue return for the period 678 139 608
Capital return for the period 1,440 26,708 17,582
Net movement in Shareholders' 2,118 26,847 18,190
funds
Opening Shareholders' funds 80,196 53,349 53,349
Closing Shareholders' funds 82,314 80,196 71,539
Notes to the Interim Accounts
1. The revenue return per ordinary share is based on the net revenue return on
ordinary activities after taxation and on 13,933,206 (31 July 2003: 13,933,206,
31 January 2004: 13,933,206) ordinary shares, being the weighted average number
of ordinary shares in issue in the period.
The capital return per ordinary share is based on the net capital return on
ordinary activities after taxation and on 13,933,206 (31 July 2003: 13,933,206,
31 January 2004: 13,933,206) ordinary shares being the weighted average number
of ordinary shares in issue in the period.
2. The basic net asset value per ordinary share of £1 is calculated on net
assets of £82,314,000; (31 July 2003: £71,539,000, 31 January 2004: £
80,196,000) and on 13,933,206 (31 July 2003: 13,933,206, 31 January 2004:
13,933,206) shares in issue.
3. 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 842 of the Income and Corporation Taxes Act 1988.
4. The foregoing information at 31 January 2004 is an abridged version of the
Company's full Accounts which carry an unqualified Auditor's report and have
been filed with the Registrar of Companies.
By order of the Board
INVESCO Asset Management Limited
Secretaries
29 September 2004
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