Half-yearly Report
MONTANARO UK Smaller Companies Investment Trust PLC ("MUSCIT")
Half yearly Report 2010
MUSCIT was launched in March 1995 and is listed on the London Stock Exchange.
Investment Objective
The investment objective is capital appreciation through investing in small
quoted companies listed on the London Stock Exchange or traded on the
Alternative Investment Market ("AIM") and to achieve relative outperformance of
its benchmark, the FTSE SmallCap (excluding investment companies) Index
("SmallCap").
No unquoted investments are permitted.
Investment Policy
The Company seeks to achieve its objective and to diversify risk by investing
in a portfolio of quoted UK small companies. At the time of initial investment,
a potential investee company must be profitable and smaller than the largest
constituent of the HGSC Index, which represents the smallest 10% of the UK
Stock Market by value. At the end of September 2010, the largest company in the
HGSC was capitalised at just over £2bn. The Manager focuses on the smaller end
of this Index.
In order to manage risk the Manager will normally limit any one holding to a
maximum of 5% of the Company's investments. The weightings for every stock are
closely monitored to ensure they reflect the underlying liquidity of the
particular company. The Company's AIM exposure is also closely monitored by the
Board and is limited to 30% of total investments with Board approval required
for exposure to be above 25%.
The Manager is focused on identifying high quality niche companies operating in
growth markets. This typically leads the Manager to invest in companies that
enjoy high barriers to entry, a sustainable competitive advantage and strong
management teams. The portfolio is therefore constructed on a "bottom up" basis
and there are no "sectoral" constraints placed on the Manager.
The Board, in consultation with the Manager, is responsible for determining the
gearing strategy of the Company. Gearing is used to enhance returns when the
timing is considered appropriate. The Company currently has a credit facility
of £15 million through ING Bank this was fully drawn at the date of this
report. The Board has agreed to limit borrowings to 25% of shareholders' funds.
Investment Philosophy
Over the very long-term SmallCap has delivered superior returns relative to
LargeCap. Less detailed research is a primary cause of continuing inefficiency
in the asset class. The Manager believes that it can exploit this inefficiency
by devoting its significant in-house analytical resource to both proprietary
idea generation and research.
The Manager further believes that a conservative, long-term approach to
investing in high quality companies will deliver superior returns and has
developed its own screening and valuation tools to help identify companies
which are not only of the highest quality but also undervalued. Key to success
is emphasis on management quality, first hand research and meetings with
management, as well as experience and commonsense.
Highlights
for the 6 months to 30 September 2010
Results
> Net Asset Value ("NAV") including current period revenue: +20% (£122 million)
> Share price: +29%
> SmallCap: +4%
As at As at
30 September 31 March
2010 2010
NAV per Ordinary share 363.63p 302.59p
(including current period
revenue)
Ordinary share price 301.25p 234.00p
NAV Performance vs SmallCap
(to 30 September 2010)
6 months 3 years 5 years Since
inception
March 1995
% % % %
NAV (excluding 20.7 4.7 42.9 265.6
current period
revenue)
SmallCap Index 3.6 (31.0) (20.6) 43.9
Outperformance 17.1 35.7 63.5 221.7
Capital Structure
As at 30 September 2010 the Company had 33,475,958 Ordinary shares of 10p each
in issue (none of which were held in Treasury).
Manager's Review
Performance
Over the six months ended 30 September 2010, the Company's NAV rose by 21%
excluding current period revenue, outperforming its benchmark which rose by 4%.
Whilst the SmallCap fell by 4% over the last 12 months the Fund increased its
NAV by 31% over the same period.
From the launch of the Company in March 1995 to the end of September 2010, the
NAV has increased by 266% compared to 44% by the SmallCap.
Review
In the 2010 Report & Accounts, we commented on the "Dash for Trash" and the
negative impact this had on the relative performance of the Company during the
period March 2009 to September 2009. It is pleasing to note strong absolute and
relative performance over the past year. This is partly a result of the good
performance of quality companies, which form the basis of our investment style,
as well as a marked increase in corporate activity which has been beneficial.
Three long standing holdings were acquired over the past six months at a
significant premium: Chloride, Scott Wilson and Dana Petroleum.
In the first quarter ended 30 June 2010, investors were still preoccupied with
concerns over sovereign debt, the BP disaster in the Gulf of Mexico and the
possibility of a hung parliament in the UK. The latter became a reality but was
well received in the financial markets with 10 year gilt yields falling to
below 3% and Sterling strengthening against the Dollar and Euro. Equity markets
however, remained volatile over the first quarter and ended lower.
The second quarter ended 30 September 2010 saw a strong recovery by equities
with the advent of Quantitative Easing (mark 2), the sealing of BP's well in
the Gulf of Mexico and realisation that, with the continued strength of
corporate profitability, equity valuations were attractive both in terms of
Price to Earnings and Yield.
We have long argued that many analysts were too cautious about the prospects of
earnings recovery, under-estimating the operational gearing of companies
following cost-cutting in 2008. This has been illustrated by a raft of
significant profit upgrades amongst some of the better managed companies.
Finding some of these "golden nuggets" has been a contributing factor behind
the Fund's outperformance in the period: e.g. Dialight (LED lighting), Domino
Printing (industrial printers); Victrex and Croda (speciality chemicals);
Domino's Pizza; Renishaw (metrology instruments) and Devro (artificial casings
for the meat industry) have all seen large increases in consensus expectations
over the last 12 months and may well see more in the future.
On the other hand, some management teams did not live up to our expectations
and were found wanting in more challenging times. This led to the sale of a
number of holdings and a reduction in the number of holdings as we focused on
maintaining the high quality of the portfolio.
Outlook
Concern about hyperinflation earlier in the year was replaced by anxiety about
the spectre of deflation, notably in the US where core CPI dipped below 1%.
Hopes of a V-shaped recovery in the job market vanished early in the year as
companies, uncertain about the sustainability of the recovery, chose to fill
new orders with existing capacity. From a peak of 5% in Q4, US GDP growth
slowed to 3.7% in Q1 and a mere 1.7% in Q2.
However, leading indicators do not point to the double-dip that pre-occupies
many and the message from our companies is more upbeat than some economists.
History shows that recoveries are often followed by a mid-cycle slowdown but
rarely by a second recession. Central Banks are ready to resume asset purchases
(Quantitative Easing) should the economy show signs of renewed vulnerability.
Growth in Emerging Markets has remained buoyant. China has managed to tighten
monetary policy and reduce lending to the property sector without incurring a
broad-based slowdown. Between May and September this year, economists actually
raised their growth forecasts for China in 2011. The United States, UK and
Japan are all contemplating another round of Quantitative Easing and are well
aware that currency weakness can be added to the list of gains from such policy
measures giving a boost to exports.
The last three months have seen a continued recovery in equity markets albeit a
somewhat volatile one. Equity valuations remain attractive. Paradoxically,
SmallCap appears to be an under-owned and unloved asset class despite having
delivered good performance. We retain our positive stance as we enter the
second half of the Company's financial year.
Charles Montanaro
Montanaro Asset Management Limited
30 November 2010
Important Events
Following approval by shareholders at the Annual General Meeting on 30 July
2010, a final dividend of 3.2p per Ordinary share was paid on 13 August 2010 to
shareholders on the register at the close of business on 2 July 2010.
On 1 April 2010, Kathryn Matthews joined the Board. She has worked in the
investment industry since 1981 and her most recent role was as chief investment
officer of Asia Pacific (ex Japan) for Fidelity International. She has
previously held appointments at William M Mercer, AXA Investment Managers,
Santander Global Advisors and Baring Asset Management.
It is with great sadness that the Board reports their friend and former
Director Laurie Petar died on 25 July 2010; he will be sorely missed.
Following over a decade of outstanding service to the Company, Chris Jones
stood down from the Board at this year's AGM. He has been replaced by Roger
Cuming as Senior Independent Director. The Remuneration and Nomination
Committees are both chaired by Kathryn Matthews. Michael Moule is responsible
for chairing the Management Engagement Committee.
The Company started the period with £10 million drawn down from its facility
with ING, and a further £5 million was drawn down taking the Company to its
full drawn down loan facility of £15 million. At the end of September 2010, the
Company's gearing level stood at 9.9%.
Thirty Largest Holdings
as at 30 September 2010
Holding Sector Value % of Market cap
£'000 portfolio £m
Domino Printing Sciences Electronic and Electrical 4,344 3.2 599
PLC Equipment
SDL PLC Software and Computer 4,033 3.0 466
Services
Domino's Pizza UK Travel and Leisure 4,003 3.0 755
& IRL PLC
Victrex PLC Chemicals 3,867 2.9 1,067
Devro PLC Food Producers 3,838 2.9 409
NCC Group PLC Software and Computer 3,548 2.6 150
Services
Shaftesbury PLC Real Estate Investment 3,463 2.6 983
Trusts
Fisher (James) & Sons PLC Industrial Transportation 3,451 2.6 246
Dignity PLC General Retailers 3,445 2.6 440
Mears Group PLC Support Services 3,441 2.6 253
Ten Largest Holdings 37,433 28.0
Immunodiagnostic Systems Health Care Equipment and 3,436 2.6 252
Holdings PLC Services
Premier Oil PLC Oil and Gas Producers 3,308 2.5 1,925
RPS Group PLC Support Services 3,273 2.5 405
WSP Group PLC Support Services 3,263 2.4 239
Ocean Wilson Holdings Industrial Transportation 3,043 2.3 398
Limited
Renishaw PLC Electronic and Electrical 2,987 2.2 750
Equipment
Brammer PLC Support Services 2,985 2.2 191
Helical Bar PLC Real Estate Investment and 2,976 2.2 319
Services
Dialight PLC Electronic and Electrical 2,974 2.2 140
Equipment
Fenner PLC Industrial Engineering 2,903 2.2 446
Twenty Largest Holdings 68,581 51.3
Barr (AG) PLC Beverages 2,869 2.2 477
Brooks Macdonald Group PLC General Financials 2,862 2.1 95
Ricardo PLC Support Services 2,784 2.1 152
Chemring Group PLC Aerospace and Defence 2,705 2.0 1,061
Consort Medical PLC Health Care Equipment and 2,692 2.0 128
Services
Croda International PLC Chemicals 2,668 2.0 2,035
Carclo PLC Chemicals 2,636 2.0 104
Dechra Pharmaceuticals PLC Pharmaceuticals and 2,588 1.9 311
Biotechnology
Aveva Group PLC Software and Computer 2,480 1.9 994
Services
Latchways PLC Support Services 2,472 1.9 78
Thirty Largest Holdings 95,337 71.4
Interim Management Report and Responsibility Statement
Interim Management Report
The important events that have occurred during the period under review are
detailed in the Manager's Review. The key factors influencing the financial
statements are also set out in the Manager's Review.
The principal risks and uncertainties for the remaining six months of the
financial year are reviewed in the Outlook section of the Manager's Review. The
Company actively monitors its counterparty exposures and has been particularly
vigilant during the period.
Under the Listing Rules the Manager is regarded as a related party of the
Company. The amounts paid to the Manager during the period, were £622,000 (30
September 2009: £440,000; year to 31 March 2010: £973,000). At 30 September
2010, the amount due to Montanaro Asset Management Limited, included in
creditors was £114,000.
However, the existence of an independent Board of Directors demonstrates that
the Company is free to pursue its own financial and operating policies.
Therefore in terms of FRS 8 "Related Party Transactions" the Manager is not
considered a related party.
Responsibility Statement
The Directors confirm that to the best of their knowledge:
• the condensed set of financial statements has been prepared in accordance
with the Statement on Half-Yearly Financial Reports issued by the UK Accounting
Standards Board;
• the interim management report includes a fair review of the information
required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of
important events that have occurred during the first six months of the
financial year and their impact on the condensed set of financial statements;
and a description of the principal risks and uncertainties for the remaining
six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party
transactions that have taken place in the first six months of the current
financial year and that have materially affected the financial position or
performance of the entity during that period; and any changes in the related
party transactions described in the last annual report that could do so.
This Half-Yearly Report was approved by the Board of Directors on 30 November
2010 and the above responsibility statement was signed on its behalf by David
Gamble, Chairman.
Income Statement (unaudited)
for the 6 months to 30 September 2010
6 months to 30 September 6 months to 30 September Year to 31 March
2010 2009 2010
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains on - 20,804 20,804 - 28,788 28,788 - 37,277 37,277
investments
designated
at fair
value
through
profit or
loss
Dividends 1,620 - 1,620 1,560 - 1,560 3,206 - 3,206
and interest
Management (311) (311) (622) (220) (220) (440) (486) (487) (973)
fee
Other income - - - 4 - 4 3 - 3
Other (169) - (169) (176) - (176) (341) - (341)
expenses
Net return 1,140 20,493 21,633 1,168 28,568 29,736 2,382 36,790 39,172
before
finance
costs and
taxation
Interest (64) (64) (128) (42) (42) (84) (86) (86) (172)
payable and
similar
charges
Net return 1,076 20,429 21,505 1,126 28,526 29,652 2,296 36,704 39,000
before
taxation
Taxation - - - - - - - - -
Net return 1,076 20,429 21,505 1,126 28,526 29,652 2,296 36,704 39,000
after
taxation
Return per 3.21 61.03 64.24 3.37 85.21 88.58 6.86 109.64 116.50
ordinary
share
(pence)
The total column of this statement is the profit and loss account of the
Company. The supplementary revenue and capital columns are presented under
guidance issued by the Association of Investment Companies (AIC).
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the period.
No Statement of Total Recognised Gains and Losses has been prepared as all such
gains and losses are shown in the Income Statement.
Reconciliation of Movements in Shareholders' Funds (unaudited)
for the 6 months to 30 September 2010
Called-up Share Capital Special Capital Revenue Total
share premium redemption reserve reserve reserve equity
capital account reserve shareholders
funds
6 months to £'000 £'000 £'000 £'000 £'000 £'000 £'000
30 September
2010
As at 1 3,348 19,307 1,362 4,642 70,152 2,484 101,295
April 2010
Fair value - - - - 20,804 - 20,804
movement of
investments
Costs - - - - (375) - (375)
allocated to
capital
Net revenue - - - - - 1,076 1,076
for the
period
Dividends - - - - - (1,071) (1,071)
paid in
period
As at 30 3,348 19,307 1,362 4,642 90,581 2,489 121,729
September
2010
6 months to
30 September
2009
As at 1 3,348 19,307 1,362 4,642 33,448 3,485 65,592
April 2009
Fair value - - - - 28,788 - 28,788
movement of
investments
Costs - - - - (262) - (262)
allocated to
capital
Net revenue - - - - - 1,126 1,126
for the
period
Dividends - - - - - (2,293) (2,293)
paid in
period
As at 30 3,348 19,307 1,362 4,642 61,974 2,318 92,951
September
2009
Year to 31
March 2010
As at 1 3,348 19,307 1,362 4,642 33,448 3,485 65,592
April 2009
Fair value - - - - 37,277 - 37,277
movement of
investments
Costs - - - - (573) - (573)
allocated to
capital
Net revenue - - - - - 2,296 2,296
for the year
Dividends - - - - - (3,297) (3,297)
paid in the
year
As at 31 3,348 19,307 1,362 4,642 70,152 2,484 101,295
March 2010
Balance Sheet (unaudited)
as at 30 September 2010
As at As at As at
30 September 30 September 31 March
2010 2009 2010
£'000 £'000 £'000
Fixed assets
Investments designated at fair value 133,549 100,858 110,160
through profit and loss
Current assets
Debtors 486 2,131 341
Cash at bank 2,968 609 2,196
3,454 2,740 2,537
Creditors: amounts falling due
within one year
Other creditors (274) (647) (1,402)
Revolving credit facility (15,000) (10,000) (10,000)
(15,274) (10,647) (11,402)
Net current liabilities (11,820) (7,907) (8,865)
Total assets less current 121,729 92,951 101,295
liabilities
Net assets 121,729 92,951 101,295
Share capital and reserves
Called-up share capital 3,348 3,348 3,348
Share premium account 19,307 19,307 19,307
Capital redemption reserve 1,362 1,362 1,362
Special reserve 4,642 4,642 4,642
Capital reserve 90,581 61,974 70,152
Revenue reserve 2,489 2,318 2,484
Total equity shareholders' funds 121,729 92,951 101,295
Net asset value per Ordinary share 363.63p 277.67p 302.59p
Summarised Statement of Cash Flows (unaudited)
as at 30 September 2010
As at As at As at
30 September 30 September 31 March
2010 2009 2010
£'000 £'000 £'000
Net cash inflow from operating 712 1,049 1,911
activities
Servicing of finance
- Interest and similar charges paid (94) (86) (125)
Net cash outflow from servicing of (94) (86) (125)
finance
Capital expenditure and financial
investment
- Purchases of investments (40,190) (23,758) (47,066)
- Sales of investments 36,415 14,530 39,606
Net cash outflow from capital (3,775) (9,228) (7,460)
expenditure and financial investment
Equity dividends paid (1,071) (2,293) (3,297)
Net cash outflow before financing (4,228) (10,558) (8,971)
Financing
- Proceeds of short-term credit 5,000 5,000 5,000
facility
Net cash inflow from financing 5,000 5,000 5,000
Increase/(decrease) in cash 772 (5,558) (3,971)
Notes to the Financial Statements
as at 30 September 2010
1 Financial information
The financial information contained in this report does not constitute full
statutory accounts as defined in section 434 of the Companies Act 2006. The
comparative financial information for the year ended 31 March 2010 does not
constitute statutory accounts within the meaning of Section 434 of the
Companies Act 2006. The financial information for the six months ended 30
September 2010 and 30 September 2009 has not been audited or reviewed by the
Company Auditor pursuant to the Auditing Practices Board guidance on such
reviews.
The information for the year ended 31 March 2010 has been extracted from the
latest published audited financial statements, which have been filed with the
Registrar of Companies. The Report of the Auditors on those financial
statements was unqualified and did not contain a statement under section 498 of
the Companies Act 2006.
The Company has adequate financial resources to meet its investment commitments
and as a consequence, the Directors believe that the Company is well placed to
manage its business risks. After making appropriate enquiries, the Directors
have a reasonable expectation that the Company has adequate available financial
resources to continue in operational existence for the foreseeable future and
accordingly have concluded that it is appropriate to continue to adopt the
going concern basis in preparing the half-yearly report.
The financial statements are prepared on the basis of the accounting policies
set out in note 1 of the annual financial statements for the year ended 31
March 2010.
2 Tax credit/charge on ordinary activities
The tax charge for the half-year is nil (30 September 2009: nil; 31 March 2010:
nil) based on an estimated effective tax rate of 0% for the year ending 31
March 2010. The estimated effective tax rate is 0% as investment gains are
exempt from tax owing to the Company's status as an Investment Trust and there
is expected to be an excess of management expenses over taxable income.
3 Reconciliation of net return before finance costs and taxation to net cash
inflow from operating activities
6 months to 6 months to Year to
30 September 30 September 31 March
2010 2009 2010
£'000 £'000 £'000
Net return before finance costs and 21,633 29,736 39,172
taxation
Gains on investments designated at (20,804) (28,788) (37,277)
fair value through profit or loss
Increase in creditors 28 64 40
(Increase)/decrease in prepayments (145) 37 (24)
and accrued income
Net cash inflow from operating 712 1,049 1,911
activities
4 Reconciliation of net cash flows to movements in net debt
6 months to 6 months to Year to
30 September 30 September 31 March
2010 2009 2010
£'000 £'000 £'000
Increase/(decrease) in cash in the 772 (5,558) (3,971)
period
Proceeds of credit facility (5,000) (5,000) (5,000)
Movement in net debt (4,228) (10,558) (8,971)
Net debt at beginning of period (7,804) 1,167 1,167
Net debt at end of period (12,032) (9,391) (7,804)
5 Analysis of net debt
As at As at
1 April 30 September
2010 Cash flows 2010
£'000 £'000 £'000
Cash at bank 2,196 772 2,968
Debt due in less than one year (10,000) (5,000) (15,000)
(7,804) (4,228) (12,032)
Directors
David Gamble (Chairman)
Roger Cuming
Kathryn Matthews
Michael Moule
Advisers
Manager Bankers
Montanaro Asset Management Limited HSBC International
53 Threadneedle Street PO Box 181
London 27-32 Poultry
EC2R 8AR London EC2P 2BX
Tel: 020 7448 8600
Fax: 020 7448 8601 ING Bank N.V.
www.montanaro.co.uk London Branch
info@montanaro.co.uk 60 London Wall
London EC2M 5TQ
Company Secretary, Administrator and Auditor
Registered Office
Capita Sinclair Henderson Limited KPMG Audit Plc
Beaufort House 100 Temple Street
51 New North Road Bristol BS1 6AG
Exeter EX4 4EP
Tel: 01392 412 122 Solicitors
Fax: 01392 253 282 Norton Rose LLP
3 More London Riverside
London SE1 2AQ
Registrars Corporate Broker
Capita Registrars Winterflood Securities Limited
Shareholder Services Department The Atrium Building
The Registry Cannon Bridge
34 Beckenham Road 25 Dowgate Hill
Beckenham London EC4R 2GA
Kent BR3 4TU
Tel: 0871 664 0300
(calls cost 10p per minute plus network
charges)
Fax: 020 639 2342
ssd@capitaregistrars.com
www.capitaregistrars.com
Montanaro UK Smaller Companies
Investment Trust PLC
Registered in England and Wales No.
3004101
An investment company as defined under
Section 833 of the Companies Act 2006
Website: www.montanarouksmaller.co.uk
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