Annual Financial Report
SVM UK EMERGING FUND PLC
ANNUAL FINANCIAL RESULTS
FOR THE YEAR ENDED 31 MARCH 2010
INVESTMENT OBJECTIVE
The objective of the Fund is to achieve long term capital growth from
investments in smaller UK companies with a particular focus on the those listed
on the Alternative Investment Market ("AIM").
HIGHLIGHTS
* Net asset value increased by 53.2% compared to a rise of 72.8% in the FTSE
AIM Index
* Excellent medium and long term outperformance.
* The Fund retains its defensive position combining a number of special
situations with a high cash weighting.
* The Fund retains a concentrated portfolio targeted on absolute performance
CHAIRMAN'S STATEMENT
I am pleased to be able to report a positive year for the Fund's asset value
and share price. Over the year to 31 March 2010, the asset value increased by
53.2% to 68.53 pence compared to a surge of 72.8% in the benchmark, FTSE AIM
Index. The Fund's share price rose 61.3% to 50 pence as at the end of March and
the discount narrowed almost four percentage points to 27%.
It is interesting to note that over the last two years, which encapsulates the
collapse and subsequent recovery in stockmarkets and investor sentiment, the
Fund's asset value is up 5% against the benchmark which is down 24%. Indeed,
this outperformance is sustained over the longer term with the Fund returning
113% against a decline of 19% in the benchmark index since the Fund's remit
change in September 2004. Incidentally, the FTSE All Share Index is up just 55%
over this period, less than half that generated by the Fund. We believe this
amply demonstrates the validity of the investment remit and the ability of the
Managers to deliver this. Since the year end, the Fund has resumed both its
relative and absolute performance.
Review of the year
Although the year under review showed strong positive stockmarket returns, the
environment remained challenging for investors with conflicting economic and
company specific information. Undoubtedly, at the start of the financial year,
stockmarkets in general and smaller companies in particular had been massively
de-rated and were in heavily oversold territory. The subsequent rally, one of
the strongest in a generation, has arguably taken markets ahead of the
underlying economics. As the risk of financial collapse and prolonged recession
has largely been avoided, the unprecedented stimulus provided by central banks
globally has decreased and ultimately will have to be reversed. Only then will
we know whether the recovery is sustainable and how strong it will be.
As many smaller companies tend to operate with limited financial leverage and
in more niche areas, they should have been less impacted by economic collapse.
However, smaller companies were perceived as being riskier than their larger
counterparts and were treated savagely. In the subsequent rally, this was
reversed and smaller companies resumed their outperformance. Barring a major
reversal in the global economy, this trend should continue as their high growth
potential is more fully recognised.
Portfolio
There are approximately forty companies in the portfolio with 84% invested in
AIM listed companies. The balance is spread between selective unquoted
investments and a very small number of residual positions quoted on the junior
PLUS market. In terms of sectors, the Fund continues to retain an overweight
exposure to resources, industrials and consumer services with little in
financials and property. Five new companies were introduced into the portfolio
in the year financed by the reduction in some of the larger holdings.
The Fund continues to be concentrated on a relatively small number of holdings,
many of which are special situations. A number of these holdings offer
defensive characteristics which substantially helped in 2008 and early 2009 but
has led to the Fund lagging in the past year. In addition, the Fund maintains a
healthy cash position which has and will be used opportunistically to take
advantage of pricing anomalies. By being benchmark aware rather than attempting
to replicate sector weightings, the Fund has demonstrated substantially less
volatility than both the AIM Index or indeed the broader market, represented by
the FTSE All-Share Index.
The Managers believe that this approach gives the potential of both relative
out-performance and absolute gains. Although individual investment risk is
higher, this can be mitigated through a diversified portfolio. There is always
a trade off between holding a broadly diversified portfolio which will
demonstrate benchmark type returns against holding relatively few large
positions with the potential of strong performance. The Managers continue to
favour the latter approach.
Annual General Meeting
The Annual General Meeting will be held on 16 July 2010 at SVM's offices in
Edinburgh. As prescribed by the Articles of Association, an ordinary resolution
will be proposed that the Fund should continue for a further five year period.
Outlook
The Fund retains a concentrated portfolio of special situations and companies
that exhibit higher than average growth potential but remain modestly valued.
These companies should benefit as the global recession ends and economic growth
resumes, although many are not reliant on a strong sustained recovery for their
growth potential. The Fund retains maximum flexibility with ample cash
resources and the facility to borrow and take hedging positions.
The Board and the Managers believe that the Fund is well placed to outperform
both relatively and absolutely. Its aim remains to deliver long term capital
growth, lower volatility and absolute returns.
Peter Dicks
Chairman
11 June 2010
INCOME STATEMENT
Year to 31 March 2010 Year to 31 March 2009
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Net gains / (losses) on - 1,474 1,474 - (1,202) (1,202)
investments
Income 23 - 23 40 - 40
Investment management fees - - - - - -
VAT recovered on - - - - 7 7
management fees
Other expenses (63) (2) (65) (64) (2) (66)
-------- ------- -------- -------- ------- --------
Return before interest and (40) 1,472 1,432 (24) (1,197) (1,221)
taxation
Finance costs (3) - (3) (26) - (26)
-------- -------- -------- -------- -------- --------
Transfer from reserves (43) 1,472 1,429 (50) (1,197) (1,247)
-------- -------- -------- -------- -------- --------
Return per ordinary share (0.72p) 24.52p 23.80p (0.84p) (19.93p) (20.77p)
The total column of this statement is the profit and loss account of the Fund.
All revenue and capital items in this statement derive from continuing operations.
A Statement of Total Recognised Gains and Losses is not required as all gains
and losses of the Fundhave been reflected in the above statement.
BALANCE SHEET
As at As at
31 March 31 March
2010 2009
£'000 £'000
Investments at fair value through profit 3,848 2,521
or loss
--------- ---------
Current assets 883 730
Creditors: amounts falling due within one (616) (565)
year
--------- ---------
Net current assets 267 165
--------- ---------
Total assets less current liabilities 4,115 2,686
--------- ---------
Equity shareholders' funds 4,115 2,686
--------- ---------
Net asset value per ordinary share 68.53p 44.73p
CASH FLOW STATEMENT
Year to Year to
31 March 31 March
2010 2009
£'000 £'000
Net cash outflow from operating activities (40) (22)
Returns on investment and servicing finance (3) (26)
Capital expenditure and financial 191 420
investment
Taxation paid - (4)
--------- ---------
Increase in cash 148 368
--------- ---------
RECONCILIATION OF MOVEMENT IN SHAREHOLDERS FUNDS
For the year to 31 March 2010
Share Share Special Capital Capital Revenue
capital premium reserve redemption reserve reserve
reserve
£'000 £'000 £'000 £'000 £'000 £'000
As at 1 April 2009 300 314 5,144 27 (2,646) (453)
Return / (loss) attributable - - - - 1,472 (43)
to shareholders
------- ------- ------- ------- ------- -------
As at 31 March 2010 300 314 5,144 27 (1,174) (496)
------- ------- ------- ------- ------- -------
For the year to 31 March 2009
Share Share Special Capital Capital Revenue
capital premium reserve redemption reserve reserve
reserve
£'000 £'000 £'000 £'000 £'000 £'000
As at 1 April 2008 300 314 5,144 27 (1,449) (403)
Loss attributable to - - - - (1,197) (50)
shareholders
------- ------- ------- ------- ------- -------
As at 31 March 2009 300 314 5,144 27 (2,646) (453)
------- ------- ------- ------- ------- -------
DIRECTORS' RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS
The Directors are responsible for preparing the financial statements in
accordance with applicable law and regulations. Company law requires the Board
to prepare financial statements for each financial year. Under that law, the
Directors have elected to prepare the financial statements in accordance with
United Kingdom Generally Accepted Accounting Practice (UK Standards and
applicable law).
The financial statements are required by law to give a true and fair view of
the state of affairs of the Fund at the end of the financial year and of the
net return of the Fund for that year. In preparing these financial statements,
the Directors are required to: (a) select suitable accounting policies and then
apply them consistently; (b) make judgments and estimates that are reasonable
and prudent; and (c) state whether applicable accounting standards have been
followed.
The Board is also responsible for the maintenance of proper accounting records
which disclose with reasonable accuracy, at any time, the financial position of
the Fund and to enable them to ensure that the financial statements comply with
the Companies Act 1985. They are also responsible for safeguarding the assets
of the Fund and for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
To the best of the knowledge of the Board, the financial statements give a true
and fair view of assets, liabilities, financial position and profit/loss and
the Report of the Directors includes a fair review of the development and
performance of the Fund and a description of the principal risks that it faces.
PRINCIPAL RISKS & UNCERTAINTIES
The Board believes that the Fund has a relatively low risk profile in the
context of the investment trust industry. This belief arises from the fact that
the Fund has a simple capital structure; invests primarily in UK quoted
companies; has limited exposure to derivatives; and outsources all the main
operational activities to recognised, well established firms.
The principal risks inherent within the Fund are market related and have been
classified as valuation risk, liquidity risk, interest rate risk and credit
risk. Additional risks faced by the Fund can be categorised under the following
headings; investment policy and strategy, share price discount, regulatory and
operational / financial risk. The Fund has an established environment for the
management of these risks which are continually monitored by the Managers. The
Board regularly considers the risks associated with the Fund and receives both
formal and informal reports from the Managers and third party service providers
addressing these risks. Explanations of these risks and how they are mitigated
are detailed in the Annual Report, which will be available on the Manager's
website shortly.
NOTES
1. The accounts have been prepared in accordance with applicable accounting
standards and the 2009 Statement of Recommended Practice (SORP) issued by the
Association of Investment Companies.
2. Returns per share are based on a weighted average of 6,005,000 (2009 -
6,005,000) ordinary shares in issue during the year.
Total return per share is based on the total return for the year of 1,429,000
(2009 - loss of £1,247,000).
Capital return per share is based on net capital return for the year of £
1,472,000 (2009 - loss of £1,197,000).
Revenue return per share is based on the revenue loss after taxation for the
year of £43,000 (2009 - £50,000).
The number of shares in issue at 31 March 2010 was 6,005,000 (2009 - 6,005,000)
3. Due to the size of the Fund, the Investment Managers have waived their fees
for the year to 31 March 2009 and 2010.
4. The above unaudited figures do not constitute full accounts in terms of
Section 435 of the Companies Act 2006 and are based on the report and accounts
for the year to 31 March 2010. The accounts for the year to 31 March 2009, on
which the auditors issued an unqualified report have been lodged with the
Registrar of Companies and did not contain a statement required under Section
498 of the Companies Act 2006.
5. The annual report and accounts will be available on the Managers website
www.svmonline.co.uk from the middle of June 2010. These accounts can be mailed
to shareholders on request to the Managers and will be lodged with the
Registrar of Companies. Copies are also available for inspection at 7 Castle
Street, Edinburgh EH2 3AH, the registered office of the Fund.
For further information, please contact:
Donald Robertson SVM Asset Management 0131 226 6699
Roland Cross Broadgate Mainland 020 7726 6111
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