Annual Financial Report

RNS Number : 4698D

Artemis Alpha Trust PLC

06 July 2016

 

Artemis Alpha Trust plc (the "Company")

Annual Financial Report for the year ended 30 April 2016

This announcement contains regulated information

Financial Highlights

Returns for the year ended 30 April 2016

Total returns	Year ended 30 April 2016	Year ended 30 April 2015
Net asset value per ordinary share	(6.1)%	(0.9)%
Ordinary share price	(13.2)%	(6.9)%
FTSE All-Share Index	(5.7)%	7.5%
Revenue and dividends
Revenue earnings per ordinary share	4.73p	4.12p
Dividends per ordinary share	3.90p	3.55p
Ongoing charges (excluding performance fees)	0.9%	0.9%
Capital	As at 30 April 2016	As at 30 April 2015
Net asset value per ordinary share	303.43p	326.28p
Ordinary share price	235.50p	275.00p
Gearing	5.2%	9.1%

Total returns to 30 April 2016	3 years	5 years	Since 1 June 2003*
Net asset value per ordinary share	5.6%	(2.0)%	386.3%
Ordinary share price	(16.7)%	(25.0)%	289.6%
FTSE All-Share Index	12.0%	29.4%	171.7%

* The date when Artemis was appointed as Investment Manager. - Source: Artemis/Datastream

Strategic Report - Chairman's Statement

Performance

The last year has seen continued volatility in markets due, in part, to concerns over China's ability to sustain its growth projections and, in the last few months, uncertainty over the EU referendum. Against this background the Company's net asset value per share fell by 6.1 per cent during the year ended 30 April 2016 on a total return basis. This compares with a fall of 5.7 per cent in the FTSE All-Share Index over the same period.

Although the quoted investments were positive contributors to performance over the year, adding 0.3 per cent, overall performance was held back by a number of reductions in value in the unquoted investments amounting to 5.5 per cent of the net asset value. More detailed commentary on the portfolio is set out in the Investment Manager's review that follows.

The latest available net asset value per share, as at 5 July 2016, was 285.43 pence.

Strategy Review

The Board remains acutely aware of the poor performance of the Company in recent years and the current level of the discount at which the shares trade to the underlying asset value. A sustained improvement in performance is needed to improve the rating of the shares and reduce the discount.

With this in mind, the Board has recently reviewed the Company's investment strategy with the fund managers. As a result, new guidelines and targets have been set, in particular for a reduction in the Company's exposure to unquoted investments. This has been a challenging area for the fund managers in recent years and has accounted for much of the poor performance and, the Board believes, has been the principal contributor to the Company's weaker share price rating. Further details of this strategy review are set out below.

The Board and fund managers have at the forefront of their minds the fact that there will be a continuation vote at the AGM in the autumn of 2018. The Board recognises the importance of delivering proof of progress for shareholders over the next twelve months.

As always, the Board welcomes the views of shareholders and will continue to engage with them to seek their views during the course of the year.

Discount and share buy-backs

The discount widened over the year from 15.7 per cent to 22.4 per cent. The Board believes this reflects a combination of poor performance and the Company's significant exposure to unquoted investments, where the news has, for the most part, been negative. The Company bought back 676,000 shares during the period, at a cost of approximately £1.6 million, representing 1.6 per cent of the shares in issue.

The Board is very concerned at the current level of the discount and has considered various options to narrow it. Putting in place a formal share buy-back programme may appear to be an obvious way of addressing this issue. For a company of our size, however, this may have negative consequences: by shrinking the size of the Company it would further reduce liquidity in its shares. It would also increase the unquoted holdings as a proportion of the portfolio. Furthermore, there would be no guarantee that any short-term reduction in the discount would be sustained; previous buy-backs have had a limited impact on the discount. Instead, the best prospect for reducing the discount on a sustainable basis is likely to come from an improvement in performance and evidence of better news and/or realisations from the unquoted portfolio.

The Board will continue to monitor the position closely. We will seek to address any imbalances between the supply and demand by buying back shares as and when appropriate.

Investment Strategy

As indicated above, an area that has clearly detracted from performance over recent years is the unquoted portfolio. The Board and fund managers have agreed that a priority is to reduce the Company's exposure to unquoted holdings from its current level of 27.3 per cent to below 10 per cent over the next two years. The fund managers remain confident that value will be generated from these holdings and that a number of realisations can be achieved during this period. Whilst the objective is to reduce the exposure to unquoted companies, this will not be done at any price, and the exact timing cannot be predicted.  Investments in new unquoted companies will only be made on an exceptional basis and then only once the investment has been formally considered and approved by the Board. Follow-on investments that will improve the prospects of the investee company - or preserve the Company's economic interest in it - will be permitted and remain at the discretion of the fund managers.

When unquoted investments are realised, it is expected that the proceeds will be invested in quoted companies. In line with the Company's wide investment remit, these could range from small cap stocks through to the largest companies of the FTSE 100. However, the Company's strong bias to smaller and mid cap companies is expected to remain, as this is where our fund managers continue to find the most promising investment opportunities. Any significant exposure to large caps is likely to be tactical in nature and consist of 'special situations' - buying shares that are undervalued and out of favour. Our fund managers are active stock-pickers and are not influenced by movements in, or constituents of, an index.

Part of the Company's investment objective is to provide a growing dividend stream and the Board will continue to target an annual rate of dividend growth of around 10 per cent. The reduction in exposure to unquoted investments and the subsequent reinvestment into quoted companies should improve the overall yield of the portfolio and support the dividend. That said, the Company has sizeable revenue reserves, providing further flexibility in managing the portfolio from a yield perspective. The dividend yield will not dictate the overall shape of the portfolio.

Earnings and Dividends

Revenue earnings for the year were 4.73p per share, an increase of 14 per cent on the previous year. The Board has declared a second interim dividend of 2.50p (2015: 2.30p) per ordinary share. The total dividends for the year ended 30 April 2016 are therefore 3.90p (2015: 3.55p), an increase of 9.9 per cent from 2015 and in line with the Company's target of increasing the dividend by approximately 10 per cent each year.

The dividend will be paid on Friday, 19 August 2016, to shareholders on the register as at Friday, 15 July 2016, with an ex-dividend date of Thursday, 14 July 2016.

Board changes

David Barron will retire as a director of the Company at this year's Annual General Meeting ("AGM"), having served as a director since February 2005 and as chairman of the audit committee for much of that period. During this time, David's expertise in, and extensive knowledge of, the investment trust sector has been invaluable. The Board would like to record their thanks and appreciation for David's very significant contribution to the Company and wish him well for the future.

Annual General Meeting

The Company's AGM will take place on Wednesday, 5 October 2016 at 11.30 am at the offices of Artemis Fund Managers Limited, Cassini House, 57 St James's Street, London, SW1A 1LD. The fund managers, John Dodd and Adrian Paterson, will make a short presentation at the meeting. The Board would welcome your attendance as it provides shareholders with an opportunity to learn more about the Company and to ask questions of the Board and the fund managers. A light lunch will follow the meeting. For those shareholders who are unable to attend, I would encourage you to make use of your proxy votes by completing and returning the form enclosed with this report.

Outlook

The recent historic vote to leave the EU has triggered an extended period of uncertainty for the UK in many respects. As most of our investments are in UK companies there will inevitably be important implications for these businesses. However, it is perhaps too early to predict where this will lead and the long-term effect on our investee companies. We will be assiduously reviewing the portfolio to see how we can protect the interests of the Company and its shareholders.

Duncan Budge

Chairman

6 July 2016

Investment Manager's Review

Performance

During the year under review, the Company's net asset value fell by 6.1 per cent on a total return basis compared with a fall of 5.7 per cent in the FTSE All-Share Index.

While the portfolio performed broadly in line with the index, the main drag related to write-downs in the portfolio of unquoted holdings. This more than offset the positive contribution from its portfolio of listed stocks.

Total returns	3 years %	5 years %	Since Launch %
Net asset value per ordinary share	5.6	(2.0)	386.3
Share price	(16.7)	(25.0)	289.6
FTSE All-Share Index	12.0	29.4	171.7

The Company's share price fell by more than the net asset value and we believe this reflected continued unease amongst investors over the unquoted portfolio. Although there have been some short-term issues with some of these investments, we believe many of them retain significant potential, a demonstration of which could prompt the Company's shares to be re-rated.

Overall the listed portfolio performed relatively well, as can be seen below.

Industry		Contribution %
Listed investments		0.3
Unquoted investments		(5.5)
Net income/expenses		(0.9)

Portfolio Review

The five largest stock contributors and detractors, along with an industry contribution analysis, are summarised in the tables below.

Five largest stock contributors

Company		Market	Contribution %
Skyepharma		LSE	1.9
Penna Consulting		AIM	1.5
Gleeson (M.J) Group		LSE	1.1
Mporium Group		AIM	0.7
Oxford Nanopore Technologies		Unquoted	0.7

Five largest stock detractors

Company		Market	Contribution %
Starcount		Unquoted	(2.9)
Reaction Engines		Unquoted	(1.2)
Gaming Realms		AIM	(1.1)
Pittards		AIM	(1.1)
Physiolab Technologies		Unquoted	(0.9)

Industry contribution

Industry			Contribution %
Technology			1.3
Healthcare			1.2
Industrials			0.4
Consumer Goods			(0.4)
Basic Materials			(0.6)
Financials			(1.5)
Oil & Gas			(2.0)
Consumer Services			(3.6)

In terms of industry contribution, technology and healthcare were the strong performers. Although holdings in the oil sector continued to be a negative, the oil price rallied towards the end of the year, climbing from $30 to $50 per barrel, enabling the Company's portfolio of oil companies to recoup some of its earlier losses. Reflecting subdued stock markets, financials were down over the year.

Listed investments

In the listed portfolio, the biggest positive contribution came from Skyepharma, which makes oral and inhalation drug delivery systems. It works in partnership with the major pharmaceutical companies who market and sell its products. The royalty payments from Flutiform, its most important product, increased substantially as it gained approval in several new countries. A proposal to merge with Vectura was put to shareholders in March and subsequently agreed. Vectura's business is in respiratory related products and the two businesses are complementary. We believe combining them will bring benefits of scale and allow the resulting business to develop the next generation of devices more rapidly.

Another notable contribution came from Penna Consulting, a recruitment and outplacement specialist, which was bought by Adecco. Penna was benefiting from strong growth in both of its divisions and its roster of longstanding blue-chip customers made it an attractive acquisition for Adecco, which is looking to increase its position in the UK market. The offer price of 365p was four times the cost of the Company's initial investment.

Helped by ultra-low interest rates and government initiatives, the housebuilding sector performed strongly. In the portfolio, the prime beneficiary was MJ Gleeson. It consists of two main divisions: homes and strategic land. The homes division specialises in low-cost housing, predominantly in the north of England where demand is strong and competition limited. Its skill in securing land at favourable prices enables it to achieve industry-leading margins. It has ambitious plans to expand geographically and to increase annual sales from below 1,000 units to 3,000 units. The strategic land division should benefit from the relaxation of the planning regulations as the government tries to increase the number of houses being built. The final strong contributor in the listed portfolio was Mporium (formerly MoPowered). Its e-commerce platform allows consumers to browse, checkout and pay for goods using their smartphones. This is the fastest growing area of online retailing. After the arrival of the new management team and two refinancings, prospects are good as we eagerly await news of the revamped product - and contract wins.

On the negative side, the biggest detractors in the listed portfolio were Gaming Realms, Pittards and GLI Finance. Gaming Realms, an online operator of social gaming and gambling businesses, made a sizeable acquisition despite the profitability of its core business remaining unproven. This has weighed on the share price and we have gradually reduced our position.

Pittards, meanwhile, has proven a frustrating investment because we believe there is considerable unfulfilled potential in the business. A company with a 200-year history, it produces leather for manufacturers throughout the world. Its main tannery is in Yeovil but it also has a tannery and three factories in Ethiopia, where it makes gloves using its own leather. There has been a significant amount of change in this business: a new chairman is overseeing a strategic review and new money has been raised, enabling the company to buy the freehold of its tannery in Yeovil. Although global leather markets remain subdued, we believe the opportunities for Pittards to add to its customer list remain compelling. The high levels of operational gearing mean that any meaningful sales growth - or even a recovery to historic levels - would lead to a very substantial increase in profits. The shares are valued at a discount to net assets and, with a new chairman and finance director now in place, we are optimistic about its prospects over the next couple of years.

GLI Finance, which invests in a number of online lending platforms, performed disappointingly. As with Pittards, there have been a number of significant changes over the last year as there were problems that needed addressing. In essence, the company had invested in too many online platforms which failed to achieve scalability and were too widely spread for management to control. A new chief executive has been appointed and he has started rationalising the portfolio and focusing on those platforms that have a clear pathway to scale and profitability. As part of this process a strategic investor has injected new capital to shore up the balance sheet. With its more focused approach and stronger balance sheet, we believe the company is well-placed to take advantage of the growth opportunities in this part of the alternative finance area.

Unquoted investments

As noted in the Chairman's statement, the poor performance of some of the Company's unquoted investments has overshadowed better performance elsewhere in the portfolio. Total exposure to unquoted investments at the year end was 27.3 per cent of the portfolio. Our intention is to significantly reduce exposure and, subject to any upward revaluations ahead of disposal, would aim to bring this down to less than 10 per cent of the portfolio over the next two years. Any further investments will only be considered on an exceptional basis. Should we to wish to make any new investment, we would agree this with the Board before doing so.

A list of the ten largest unquoted investments is set out below:

Company	Description	% of Portfolio
Starcount	Social media data analytics	3.5
Metapack	Delivery optimisation technology	3.3
Oxford Nanopore Technologies	Nanopore DNA sequencing	3.0
Claremont Alpha	Taiwan casino investments	2.7
Reaction Engines	Rocket propulsion systems	2.4
URICA	Global payment network for SMEs	1.9
Gundaline	Australian agriculture	1.3
Lamp Group	Healthcare & specialist insurance	1.2
Retail Money Markets	Peer-to-peer lending	1.2
Oxford Sciences Innovation	Oxford University intellectual property	1.1

The valuations of the unquoted holdings are reviewed quarterly by Artemis' unquoted review panel and more frequently should a significant change occur between scheduled meetings. This internal group is independent of the fund managers and is responsible for Artemis' recommendations on valuations for the unquoted investments. The main changes in valuation are summarised below.

Oxford Nanopore Technologies and Rated People raised new capital at a premium to the previous carrying values, enabling their valuations to be revised higher. This, however, was more than offset by the write-downs in Starcount, Reaction Engines, Physiolab Technologies and Maison Seven.

The valuation of Starcount was written down earlier in the financial year following a £5 million equity issue funded mainly by its management team: Edwina Dunn and Clive Humby, best known as founders of the highly successful Tesco Clubcard. The new money was invested at a relatively low price to reflect the company's slower than expected progress in winning clients. We still believe that the innovative way of using social media analysis will add significant value to its clients. If it can land one significant client we feel more will follow.

We wrote down our carrying value of Reaction Engines, despite the encouraging news that BAE Systems had decided to invest £20 million in the company, although this came at a discount to the previous funding round. BAE's investment is a positive validation of the company's technology and has also enabled it to access further grant funding from the government. The company has appointed a highly qualified chief executive, Mark Thomas, from Rolls Royce. Technology to support space transport is developing rapidly at the moment and Reaction Engines believes there may be many other applications for its unique technology.

Physiolab Technologies, a medical device company that enables soft tissue to be repaired using hot and cold compression, suffered a series of technical glitches that led to delays in getting its product to market. This resulted in cashflow problems. While the lower valuation of the fund-raising reflected these delays, we are hopeful that the company can start to convert the many expressions of interest into actual sales.

The final, and most disappointing, detractor was Maison Seven, which sells women's fashion online. Although the business was growing its revenues, it was performing well below its own budget. In a very competitive market it was clear that it would need substantial additional investment merely to break even. Having supported the company financially through the Christmas trading period, the shareholders decided to put the business into administration following very disappointing sales and the investment was written off.

The negative impact of these four investments was a 5.5 per cent reduction in the Company's net asset value.

Portfolio themes and transactions

The largest sector in the portfolio continues to be 'other financials'. Outflows from Polar Capital's large Japanese fund continued and the performance of its other products was mixed, so we reduced our longstanding holding. We reinvested some of the proceeds into another fund manager, Liontrust. In contrast to Polar Capital, it is benefiting from strong performance and good flows into its product range.

Consolidation in the wealth management space continues. Here, we used the proceeds from the takeover of Ashcourt Rowan to buy back into Brewin Dolphin, having previously sold at higher levels. At the end of the financial year, Towry Law was bought by Permira Bestinvest. This deal makes the Company's investments in Brewin Dolphin and Charles Stanley look significantly undervalued.

We took advantage of worries about 'Brexit' before the EU referendum to buy two property stocks and to buy back into Telford Homes, a developer focused on east London, having previously sold its shares at a higher level. These stocks were badly hit in the run up to the EU referendum and hit further following the result. There has been a partial recovery of the post referendum falls, but our belief is that London will remain a pre-eminent global city, made more attractive by the sharp falls in sterling.

We also bought shares in Majestic Wine following its acquisition of Naked Wines (a fast-growing retailer of wine online in the UK and US) and its appointment of a talented new chief executive, Rowan Gormley. The cash generated by the existing Majestic Wine stores is being used to fund the higher growth of Naked Wines, leading to a substantial re-rating of the shares.

Periodically, we will buy large companies if we feel their valuations have fallen too far. This year, we felt that was the case with BP, Tesco and Pearson.

In sales, we took advantage of the rebound in the oil price towards the end of the period to sell Cairn Energy. We also took profits in Powerflute, 4D Pharma and Emis Group.

Among the Company's internet-related businesses, we remain particularly impressed by the performance of Ratesetter (Retail Money Market), which passed the milestone of having lent £1 billion since inception and Metapack, whose successful expansion into Europe continues.

Our only investment in an unquoted company during the year came back in June 2015, when we bought into Oxford Sciences Innovation. This company has been set up to commercialise the intellectual property of Oxford University's mathematical, physical, life sciences and medical sciences divisions. There was very strong demand from a wide range of UK and US institutions and the company raised £350 million in total, a record for this type of fund. It has already invested in some fascinating opportunities.

Gearing

Although the Company continues to utilise its borrowing facility, cash received from our disposals exceeded purchases and saw borrowing fall from £14.5 million to £8.5 million by the year end. We will continue to use gearing to support our investment ideas when we consider it appropriate.

Investment strategy

Our strategy remains to focus on areas where we feel we have an edge over others in our understanding of a company or an industry. This will tend to be in the area of the market in which we specialise: small-cap listed companies. From time to time, however, we will invest in larger companies if we feel compelling value has emerged. In this endeavour, we can call upon the knowledge and expertise of our colleagues across the wider Artemis investment team.

As we have discussed, there is a real drive to extract value from the Company's unquoted portfolio while reducing its overall exposure to this type of stock. Although some of these businesses have taken longer to execute on their plans than we might have liked, we remain confident that there remains plenty of untapped potential.

Outlook

As we write, the market is continuing to react to the perceived implications of Brexit: a sustained period of ultra-low UK interest rates, the possibility of a recession and a prolonged period of uncertainty. Of these the last is certain, but the first two assume the worst. In turn this has divided performance in the market sharply. International earners are showing resilience, but the weight of selling is pushing domestically exposed stocks down hard. 

We are inclined to think this disparity is overdone. There is a case for switching from expensive defensives and international stocks into companies that have been swept along in the domestic negativity - yet which have the characteristics and options at their disposal to outstay such conditions. In time the market will focus on where risk is discounted - as opposed to concentrating on areas into which money has flown unthinkingly. For example pharmaceuticals will soon find themselves in the eye of the US electoral uncertainty; and similarly European stocks will reflect upon the sustainability of the remainder of the eurozone. By contrast the UK will have re-priced; and although no-one likes an investment opportunity where the good news is less bad news, that could be a basis on which the market recovers its poise.  

Meanwhile it is well worth remembering that international investors have been much more cautious about Brexit - and have been far less exposed to both European and UK stocks. Since 24 June, courtesy of the market's and sterling's weakness, UK assets are considerably cheaper for US investors than they were.

Finally, the old truism is true: volatility means opportunity. As stock-pickers, we believe that the weeks and months ahead should prove fruitful for your company.

John Dodd and Adrian Paterson

Fund managers

Artemis Fund Managers Limited

6 July 2016

Corporate strategy & policy

The Company is incorporated in England. Its business as an investment trust is to buy and sell investments with the aim of achieving the objective and policy outlined below.

Objective & Investment Policy

The objective of the Company is to achieve above average rates of total return over the longer term and to achieve a growing dividend stream. In pursuit of this objective, the Company's portfolio is actively managed by the Investment Manager and comprises largely UK equities, with selected overseas investments. The Investment Manager takes a stock-specific approach in managing the portfolio and, therefore, sector weightings are of secondary consideration. As a result of this approach the portfolio will not track any stock market index. There is no restriction on the number of investments that can be held in the portfolio.

The Company also invests in unquoted companies. The Investment Management Agreement provides that at the time of investment the aggregate value of these investments shall represent no more than 30 per cent of net assets. For the purpose of measuring this, unquoted investments will be measured by the lower of their cost or current valuation.

In addition, the Company can invest up to 30 per cent of its net assets in hedge funds and/or other unregulated collective investment schemes. The Company had no investments in hedge funds or unregulated collective investment schemes during the year. The Company will not invest more than 15 per cent of its gross assets in other investment companies listed on the main market of the London Stock Exchange.

Gearing

The Company uses gearing as part of its investment strategy. The Articles of Association (the "Articles") permit the Company to borrow up to 25 per cent of its adjusted capital and reserves. Subject to this being complied with, the level of borrowing is a matter for the Board, whilst the utilisation of borrowings is delegated to the Investment Manager. This utilisation may be subject to specific guidelines established by the Board from time to time. The current guidelines permit the Investment Manager to utilise borrowings of up to 20 per cent of net assets. The Company has a £30 million borrowing facility with The Royal Bank of Scotland plc, of which £8.5 million was drawn down at the year end. The use of gearing by the Investment Manager will vary from time to time, reflecting its views on the potential returns from stock markets. The Company's gearing is reviewed by the Board and Investment Manager on an ongoing basis.

Operating environment

The Company operates as an investment trust company and is an investment company within the meaning of section 833 of the Companies Act 2006 (the "Act").

The Company has been approved as an investment trust in accordance with the requirements of section 1158 of the Corporation Taxes Act 2010 which remains subject to the Company continuing to meet the eligibility conditions and ongoing requirements of the regulations. The Board will manage the Company so as to continue to meet these conditions.

The Company has no employees and delegates most of its operational functions to service providers.

Current & future developments

A summary of the Company's developments during the year ended 30 April 2016, together with its prospects for the future, is set out in the Chairman's Statement and Investment Manager's Review. The Board's principal focus is the delivery of positive long-term returns for shareholders and this will be dependent on the success of the investment strategy. The investment strategy, and factors that may have an influence on it, such as economic and stock market conditions, are discussed regularly by the Board and the Investment Manager. The Board regularly considers the ongoing development and strategic direction of the Company, including its promotion and the effectiveness of communication with shareholders.

Modern Slavery Act 2015

The Company does not fall within the scope of the Modern Slavery Act 2015 as its turnover is less than £35 million. Therefore no slavery and human trafficking statement is included in the Annual Financial Report.

Key Performance indicators ("KPIs")

The performance of the Company is reviewed regularly by the Board and it uses a number of KPIs to assess the Company's success in meeting its objective. The KPIs which have been established for this purpose are:

Discrete annual total returns

Year ended 30 April	Net asset value	Share price	FTSE All-Share Index
2012	(4.6)%	(13.9)%	(2.0)%
2013	(2.8)%	4.5%	17.8%
2014	13.3%	3.1%	10.5%
2015	(0.9)%	(6.9)%	7.5%
2016	(6.1)%	(13.2)%	(5.7)%

Source: Artemis/Datastream

Dividends per ordinary share

Year ended 30 April	Rate per ordinary share	Increase
2012	2.95p	3.5%
2013	3.05p	3.4%
2014	3.20p	4.9%
2015	3.55p	10.9%
2016	3.90p	9.9%

Ongoing charges as a proportion of shareholders' funds (excluding performance fees)

As at 30 April	Ongoing charges
2012	1.0%
2013	0.9%
2014	1.0%
2015	0.9%
2016	0.9%

In addition to the above KPIs, the Board monitors the discount to the underlying net asset value at which the shares trade. No specific discount target has been set, but the Board sets the policy and has given the Investment Manager discretion to exercise the Company's authority to buy-back its own shares from time to time to address any imbalances between the supply and demand in the Company's shares. This is regularly reviewed by the Board. The Board will also use its authority to issue new ordinary shares from time to time should there be excess demand for the Company's shares.

Principal risks and risk management

The Board, in conjunction with the Investment Manager has developed a risk map which sets out the principal risks faced by the Company. It is used to monitor these risks and to review the effectiveness of the controls established to mitigate them. As an investment company the main risks relate to the nature of the individual investments and the investment activities generally. These include market price risk, foreign currency risk, interest rate risk, credit risk and liquidity risk.

A summary of the key areas of risk is set out below:

·      Strategic: investment objective and policy not appropriate in the current market and not favoured by investors. The investment objective and policy of the Company is set by the Board and is subject to ongoing review and monitoring in conjunction with the Investment Manager. This includes the views expressed by the Company's Shareholders.

·     Investment: the Company's investments are selected on their individual merits and the performance of the portfolio is not likely to track the wider UK market (FTSE All-Share Index). The Company invests in smaller listed, AIM traded and unquoted investments which can be subject to a higher degree of risk than larger quoted investments. The Board considers that this risk is justified by the longer term nature of the investment objective and the Company's closed-ended structure, and that such investments should be a source of positive returns for shareholders. The Company may also have significant exposure to particular industry sectors from time to time. Risk will be diversified through having a broad range of investments in the portfolio. The Board discusses the investment portfolio with the Investment Manager at each Board meeting and part of this discussion includes a detailed review of the Company's unquoted investments, their valuations and future prospects.

The Company may borrow money for investment purposes. If the investments fall in value, any borrowings will magnify the extent of the losses. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings. All borrowing arrangements entered into require the prior approval of the Board and gearing levels are regularly discussed by the Board and Investment Manager.

·      Regulatory: failure to comply with the requirements of a framework of regulation and legislation, within which the Company operates. The Company relies on the services of the Company Secretary and Investment Manager to monitor ongoing compliance with relevant regulations and legislation.

·      Operational: disruption to or failure of the Investment Manager's and/or any other third party service providers' systems which could result in an inability to report accurately and monitor the Company's financial position. Both the Investment Manager and the Administrator have established business continuity plans to facilitate continued operation in the event of a major service disruption or disaster.

Other matters

Viability statement

In accordance with the Association of Investment Companies (the "AIC") and AIC Code of Corporate Governance (the "AIC Code"), the Board has considered the longer term prospects for the Company. The period assessed is the five years to 30 April 2021. During this period the Board is required to put forward an ordinary resolution for the continuation of the Company for a further five years, with the next vote due to take place at the annual general meeting due to be held in September 2018. The Board believes that a review to this date would be too short to be meaningful for shareholders and has considered a five year period to be appropriate.

As part of its assessment of the viability of the Company, the Board has considered each of the principal risks and the impact on the Company's portfolio of a significant fall in UK markets. The Board has also considered the liquidity of the Company's portfolio to ensure that it will be able to meet its liabilities as they fall due.

The conclusion of this review is that the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period to 30 April 2021, subject to shareholders approving the continuation of the Company in September 2018.

Life of the Company

The Company's Articles provide that, at the AGM to be held in 2018 and at every fifth AGM thereafter, a vote on whether the Company should continue in existence as an investment trust will be proposed as an ordinary resolution.

Share capital

Shareholders authorised the Company to buy back up to 14.99 per cent of the shares in issue at last year's AGM. This is used to manage the balance between supply and demand for the Company's shares in the market.

During the year the Company repurchased a total of 676,000 ordinary shares, representing 1.6 per cent of the issued share capital as at 1 May 2015 (2015: 368,200). The Company has repurchased a further 112,000 ordinary shares since the year end.

A resolution to renew the Company's buy-back authority will be put to shareholders at the AGM on 5 October 2016.

265 ordinary shares were issued during the year as a result of the exercise of subscription shares (2015: 2,292).

Directors

The Directors of the Company and their biographical details are set out in the Annual Financial Report.

No Director has a contract of service with the Company.

The Board supports the principles of diversity in the boardroom and acknowledges the benefits of having greater diversity, including gender, and considers this in seeking to ensure that the overall balance of skills and knowledge that the Board has remains appropriate so that it can continue to operate effectively. The Board's director selection policy will, first and foremost, seek to identify the person best qualified to become a director of the Company, but in so doing, consideration will be given to diversity, including gender. The Board is currently comprised of four male directors and one female director.

Social and environmental matters

The Company has no employees and has delegated the management of the Company's investments to Artemis which, in its capacity as Investment Manager, has a Corporate Governance and Shareholder Engagement document which sets out a number of principles that are intended to be considered in the context of its responsibility to manage investments in the financial interests of shareholders. Artemis undertakes extensive evaluation and engagement with company managements on a variety of matters such as strategy, performance, risk, dividend policy, governance and remuneration. All risks and opportunities are considered as part of the investment process in the context of enhancing the long-term value of shareholders' investments. This will include matters relating to material environmental, human rights and social considerations that will ultimately impact the profitability of a company or its stock market rating and hence these matters are an integral part of Artemis' thinking as investors.

As the Company has delegated the investment management and administration of the Company to third party service providers, and has no fixed premises, there are no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013, including those within the underlying investment portfolio.

Leverage

Leverage is defined in the Alternative Investment Fund Manager Directive ("AIFMD") as any method by which the Company can increase its exposure by borrowing cash or securities, or from leverage that is embedded in derivative positions. The Company is permitted by its Articles to borrow up to 25 per cent of its net assets (determined as 125 per cent under the commitment and gross ratios in the AIFMD). The Company is permitted to have additional leverage of up to 100 per cent of its net assets, which results in permitted total leverage of 225 per cent under both ratios. The Alternative Investment Fund Manager ("AIFM") monitors leverage limits on a daily basis and reviews them annually. No changes have been made to these limits during the period. At 30 April 2016, the Company's leverage was 106.06 per cent as determined using both the gross methods and 109.79 per cent under the commitment method.

The Investment Manager is not able to enter into any stocklending agreements, to borrow money against the security of the Company's investments, or create any charges over any of the Company's investments, unless prior approval has been received from the Board.

For and on behalf of the Board

Duncan Budge

Chairman

6 July 2016

Statement of Directors' responsibilities in respect of the Annual Financial Report

The Directors are responsible for preparing the Annual Financial Report and the group and parent company financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare group and parent company financial statements for each financial year. Under that law they are required to prepare the group financial statements in accordance with IFRS as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the Directors are required to:

-        select suitable accounting policies and then apply them consistently;

-        make judgements and estimates that are reasonable and prudent;

-        state whether they have been prepared in accordance with IFRS as adopted by the EU; and

-        prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Financial Statements are published on a website, artemisalphatrust.co.uk, maintained by the Company's Investment Manager, Artemis. The maintenance and integrity of the corporate and financial information relating to the Company is the responsibility of the Investment Manager. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

We confirm that to the best of our knowledge:

(a)      the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities and financial position of the Company and the Group as at 30 April 2016, and of the profit or loss of the Group for the year then ended; and

(b)      the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the Group, together with a description of the principal risks and uncertainties that it faces.

For and on behalf of the Board

Duncan Budge

Chairman

6 July 2016

Consolidated Income Statement

For the year ended 30 April 2016

			Year ended 30 April 2016						Year ended 30 April 2015
			Revenue £'000		Capital £'000		Total £'000		Revenue £'000		Capital £'000		Total £'000
Investment income			2,632		-		2,632		2,415		-		2,415
Other income			(87)		-		(87)		2		-		2
Total revenue			2,545		-		2,545		2,417		-		2,417
Losses on investments			-		(9,571)		(9,571)		-		(1,937)		(1,937)
Gains/(losses) on current asset investments			40		-		40		(63)		-		(63)
Currency losses			-		(41)		(41)		-		(4)		(4)
Total income/(loss)			2,585		(9,612)		(7,027)		2,354		(1,941)		413
Expenses
Investment management fee			(80)		(722)		(802)		(93)		(839)		(932)
Other expenses			(433)		(9)		(442)		(416)		(10)		(426)
Profit/(loss) before finance costs and tax			2,072		(10,343)		(8,271)		1,845		(2,790)		(945)
Finance costs			(40)		(360)		(400)		(48)		(442)		(490)
Profit/(loss) before tax			2,032		(10,703)		(8,671)		1,797		(3,232)		(1,435)
Tax			(13)		-		(13)		(20)		-		(20)
Profit/(loss) for the year			2,019		(10,703)		(8,684)		1,777		(3,232)		(1,455)
Earnings/(loss) per ordinary share			4.73p		(25.07)p		(20.34)p		4.12p		(7.50)p		(3.38)p

The total column of this statement represents the Statement of Comprehensive Income of the Group, prepared in accordance with International Financial Reporting Standards. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies.

All items in the above statement derive from continuing operations.

All income is attributable to the equity shareholders of Artemis Alpha Trust plc. There are no minority interests.

Balance Sheets

As at 30 April 2016

	Group 2016 £'000	Company 2016 £'000	Group 2015 £'000	Company 2015 £'000
Non-current assets
Investments	134,647	136,897	150,253	152,509
Current assets
Investments held by subsidiary	1,243	-	1,289	-
Other receivables	506	469	1,466	1,458
Cash and cash equivalents	1,753	1,587	1,778	1,189
	3,502	2,056	4,533	2,647
Total assets	138,149	138,953	154,786	155,156
Current liabilities
Other payables	(1,708)	(2,512)	(503)	(873)
Bank loan	(8,500)	(8,500)	(14,500)	(14,500)
	(10,208)	(11,012)	(15,003)	(15,373)
Net assets	127,941	127,941	139,783	139,783
Equity attributable to equity holders
Share capital	498	498	503	503
Share premium	645	645	644	644
Special reserve	53,022	53,022	54,598	54,598
Capital redemption reserve	92	92	87	87
Retained earnings - revenue	3,804	2,000	3,368	1,554
Retained earnings - capital	69,880	71,684	80,583	82,397
Total equity	127,941	127,941	139,783	139,783
Net asset value per ordinary share	303.43p	303.43p	326.28p	326.28p

These financial statements were approved by the Board of Directors and signed on its behalf on 6 July 2016 by:

Duncan Budge

Chairman

Statements of Changes in Equity

For the year ended 30 April 2016

Group	Share   capital  £'000			Share premium £'000		Special reserve £'000		Capital redemption reserve £'000		Retained earnings				Total £'000
										Revenue £'000		Capital £'000
For the year ended 30 April 2016
At 1 May 2015	503			644		54,598		87		3,368		80,583		139,783
Total comprehensive income:
Profit/(loss) for the year	-			-		-		-		2,019		(10,703)		(8,684)
Transactions with owners recorded directly to equity:
Repurchase of ordinary shares into treasury	-			-		(1,576)		-		-		-		(1,576)
Cancellation of ordinary shares from treasury	(5)			-		-		5		-		-		-
Conversion of subscription shares	-			1		-		-		-		-		1
Dividends paid	-			-		-		-		(1,583)		-		(1,583)
At 30 April 2016	498			645		53,022		92		3,804		69,880		127,941
For the year ended 30 April 2015
At 1 May 2014	539			636		55,649		51		2,994		83,815		143,684
Total comprehensive income:
Profit/(loss) for the year	-			-		-		-		1,777		(3,232)		(1,455)
Transactions with owners recorded directly to equity:
Repurchase of ordinary shares into treasury	-			-		(1,051)		-		-		-		(1,051)
Cancellation of ordinary shares from treasury	(36)			-		-		36		-		-		-
Conversion of subscription shares	-			8		-		-		-		-		8
Dividends paid	-			-		-		-		(1,403)		-		(1,403)
At 30 April 2015	503			644		54,598		87		3,368		80,583		139,783

Company	Share capital £'000	Share premium £'000	Special reserve £'000	Capital redemption reserve £'000	Retained earnings		Total £'000
					Revenue £'000	Capital £'000
For the year ended 30 April 2016
At 1 May 2015	503	644	54,598	87	1,554	82,397	139,783
Total comprehensive income:
Profit/(loss) for the year	-	-	-	-	2,029	(10,713)	(8,684)
Transactions with owners recorded directly to equity:
Repurchase of ordinary shares into treasury	-	-	(1,576)	-	-	-	(1,576)
Cancellation of ordinary shares from treasury	(5)	-	-	5	-	-	-
Conversion of subscription shares	-	1	-	-	-	-	1
Dividends paid	-	-	-	-	(1,583)	-	(1,583)
At 30 April 2016	498	645	53,022	92	2,000	71,684	127,941
For the year ended 30 April 2015
At 1 May 2014	539	636	55,649	51	1,145	85,664	143,684
Total comprehensive income:
Profit/(loss) for the year	-	-	-	-	1,812	(3,267)	(1,455)
Transactions with owners recorded directly to equity:
Repurchase of ordinary shares into treasury	-	-	(1,051)	-	-	-	(1,051)
Cancellation of ordinary shares from treasury	(36)	-	-	36	-	-	-
Conversion of subscription shares	-	8	-	-	-	-	8
Dividends paid	-	-	-	-	(1,403)	-	(1,403)
At 30 April 2015	503	644	54,598	87	1,554	82,397	139,783

Cash Flow Statements

For the year ended 30 April 2016

	Group 2016 £'000	Company 2016 £'000	Group 2015 £'000	Company 2015 £'000
Operating activities
Loss before tax	(8,671)	(8,673)	(1,435)	(1,435)
Interest payable	400	407	490	512
Losses on investments	9,571	9,577	1,937	1,955
Gains/(losses) on current asset investments	(40)	-	63	-
Currency losses	41	41	4	4
Decrease in other receivables	55	57	15	23
(Decrease)/increase in other payables	(110)	(110)	263	259
Net cash inflow from operating activities before interest and tax	1,246	1,299	1,337	1,318
Interest paid	(400)	(407)	(490)	(512)
Irrecoverable overseas tax suffered	(13)	(11)	(20)	(20)
Net cash inflow from operating activities	833	881	827	786
Investing activities
Purchases of investments	(40,521)	(37,988)	(31,548)	(29,473)
Sales of investments	48,645	46,091	45,610	43,501
Net cash inflow from investing activities	8,124	8,103	14,062	14,028
Financing activities
Repurchase of ordinary shares into treasury	(1,359)	(1,359)	(1,149)	(1,149)
Conversion of subscription shares	1	1	8	8
Dividends paid	(1,583)	(1,583)	(1,403)	(1,403)
Decrease/(increase) in inter-company loan	-	396	-	(211)
Net cash outflow from financing activities	(2,941)	(2,545)	(2,544)	(2,755)
Net decrease in net debt	6,016	6,439	12,345	12,059
Net debt at the start of the year	(12,722)	(13,311)	(25,063)	(25,366)
Effect of foreign exchange rate changes	(41)	(41)	(4)	(4)
Net debt at the end of the year	(6,747)	(6,913)	(12,722)	(13,311)
Bank loans	(8,500)	(8,500)	(14,500)	(14,500)
Cash	1,753	1,587	1,778	1,189
	(6,747)	(6,913)	(12,722)	(13,311)

Notes:

1.     Accounting policies
 

Basis of preparation 

The Group's Financial Statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. The Company's Financial Statements have also been prepared in accordance with IFRS as adopted by the EU and in accordance with the provisions of the Companies Act 2006 (the "Act"). The Company has taken advantage of the exemption provided under Section 408 of the Act not to publish its Income Statement and related notes.

Where presentational guidance set out in the Statement of Recommended Practice ("SORP") for investment trusts and venture capital trusts issued by the Association of Investment Companies ("AIC") in November 2014 is consistent with the requirements of IFRS, the Financial Statements have been prepared in accordance with the SORP.

The Group and Company Financial Statements are presented in Sterling, which is the currency of the primary environment in which the Group operates. All values are rounded to the nearest thousand pounds (£'000) except when otherwise indicated.

A number of estimates and judgements have been made in the preparation of the Financial Statements. These are reviewed regularly by the Board and Investment Manager. The most significant judgement is the valuation of unquoted investments.

2.     Income

	Year ended 30 April 2016 £'000	Year ended 30 April 2015 £'000
Investment income*
UK dividend income	2,129	1,898
UK fixed interest	21	104
Overseas dividend income	482	413
	2,632	2,415
Other income
Bank interest	7	6
Subsidiary undertaking's dealing losses	(94)	(4)
	(87)	2
Total income	2,545	2,417
Total income comprises:
Dividends and interest from investments	2,632	2,415
Bank interest	7	6
Other income and dealing losses	(94)	(4)
	2,545	2,417
Income from investments
UK quoted investments	1,878	1,508
UK unquoted investments	272	494
Overseas quoted investments	482	413
	2,632	2,415

*    All investments are designated at fair value through profit or loss on initial recognition, therefore all investment income arises on investments at fair value through profit or loss.

3.     Investment management and performance fees

	2016			2015
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Investment management fee	80	722	802	93	839	932

As at 30 April 2016, £235,000 was outstanding in respect of amounts due to the Investment Manager (2015: £288,000). As the performance of the Company's share price did not meet the criteria required for the payment of a performance fee, no payment has been made (2015: nil).

4.   Dividends paid and proposed

Set out below are the total dividends recognised in respect of the financial year ended 30 April 2016.

	Year ended 30 April 2016 £'000	Year ended 30 April 2015 £'000
2015 second interim dividend of 2.30p per ordinary share (2014: 2.00p)	985	864
2016 first interim dividend of 1.40p per ordinary share (2015: 1.25p)	589	539
	1,583	1,403

Dividends are recognised in the period in which they are due to be paid and are shown through the Statement of Changes in Equity. Therefore, the Statement of Changes in Equity for the year ended 30 April 2016 reflects the second interim dividend for the year ended 30 April 2015 which was paid on 14 August 2015. For the year ended 30 April 2016, a first interim dividend of 1.40p has been paid on 29 January 2016 and a second interim dividend of 2.50p per share will be paid on 19 August 2016.

Set out below are the total dividends paid/payable in respect of the financial year ended 30 April 2016.

	Year ended 30 April 2016 £'000	Year ended 30 April 2015 £'000
First interim dividend of 1.40p per ordinary share (2015: 1.25p)	598	539
Second interim dividend of 2.50p per ordinary share (2015: 2.30p)	1,054	985
	1,652	1,524

5.   Earnings per ordinary share
 

The revenue earnings per ordinary share is based on the revenue profit for the year of £2,019,000 (2015: £1,777,000) and on the 42,694,142 (2015: 43,086,557) ordinary shares, being the weighted average number of ordinary shares in issue during the year.

The capital loss per ordinary share is based on the capital loss for the year of £10,703,000 (2015: capital loss £3,232,000) and on the 42,694,142 (2015: 43,086,557) ordinary shares, being the weighted average number of ordinary shares in issue during the year.

There was no dilution to the returns for the year ended 30 April 2016 (2015: none) relating to the Company's issued subscription shares.

6.     Share capital
 

(a)       Share capital

	2016 Shares	2016 £'000	2015 Shares	2015 £'000
Allotted, called up and fully paid:
Ordinary shares of 1p each	42,165,142	422	42,840,877	428
Ordinary shares of 1p each held in treasury	734,000	7	578,294	6
Subscription shares of 1p each	6,862,677	69	6,862,942	69
		498		503

 (b)     Ordinary shares

	Shares	£'000
Movements in ordinary shares during the year:
Ordinary shares in issue on 1 May 2015	42,840,877	428
Repurchases of ordinary shares into treasury	(676,000)	(6)
Issue of ordinary shares on exercise of subscription shares	265	-
Ordinary shares in issue on 30 April 2016	42,165,142	422

The movements in ordinary shares held in treasury during the year are as follows:
 

	2016 Shares	2016 £'000	2015 Shares	2015 £'000
Balance brought forward	578,294	6	3,842,409	38
Repurchases of ordinary shares	676,000	6	368,200	4
Cancellation of ordinary shares	(520,294)	(5)	(3,632,315)	(36)
Balance carried forward	734,000	7	578,294	6

During the year ended 30 April 2016, a total of 676,000 ordinary shares were repurchased by the Company at a total cost, including transaction costs, of £1,576,000 for placement in treasury (2015: 368,200 ordinary shares were repurchased for placement in treasury for £1,051,000).

 (c)     Subscription shares

	Shares	£'000
Balance brought forward	6,862,942	69
Conversion of subscription shares into ordinary shares	(265)	-
Balance carried forward	6,862,677	69

During the year, holders of 265 (2015: 2,292) subscription share exercised their rights to covert those shares into ordinary shares at a price of 345 pence per ordinary share, giving a total consideration received of £1,000 (2015: £8,000).

Holders of the remaining subscription shares may exercise their right to convert those shares into ordinary shares at a price of 345 pence per ordinary share as at the close of business on the last business day in either June or December each year to 31 December 2017, whereupon rights under the subscription shares will lapse.

7.     Net asset value per ordinary share

The net asset value per share is based on the net assets of £127,941,000 (2015: £139,783,000) and on 42,165,142 (2015: 42,840,877) ordinary shares, being the number of ordinary shares in issue at the year end.

The diluted net asset value per share has been calculated on the assumption that no (2015: nil) subscription shares were exercised (as the undiluted net asset value is lower than the exercise price of 345 pence) resulting in a total of ordinary shares in issue of 42,165,142 (2015: 42,840,877).

8.     Transactions with the Investment manager and related parties

The amounts paid to the Investment Manager and amounts outstanding at the year end are disclosed in Note 3. However, the existence of an independent Board of Directors demonstrates that the Company is free to pursue its own financial and operating policies and therefore, under IAS 24: Related Party Disclosures, the Investment Manager is not considered to be a related party.

All transactions with subsidiary undertakings were on an arms length basis. During the year transactions in securities between the Company and its subsidiary undertakings amounted to £nil (2015: £nil). During the year the Company paid its subsidiary undertaking interest on the intercompany loan amounting to £7,000 (2015: £22,000).

This Annual Financial Report announcement does not constitute the Company's statutory accounts for the years ended 30 April 2016 and 30 April 2015 but is derived from those accounts. Statutory accounts for the year ended 30 April 2015 have been delivered to the Registrar of Companies.  The statutory accounts for the year ended 30 April 2015 and the year ended 30 April 2016 both received an audit report which was unqualified and did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not include statements under section 498 of the Companies Act 2006. The statutory accounts for the year ended 30 April 2016 have not yet been delivered to the Registrar of Companies and will be delivered following the Annual General Meeting.

The audited Annual Financial Report for the year ended 30 April 2016 will be available to shareholders shortly. Copies may be obtained from the Company's registered office at Cassini House, 57 St James's Street, London, SW1A 1LD or at the website at artemisalphatrust.co.uk.

The Annual General Meeting of the Company will be held on Wednesday, 5 October 2016 at 11.30 am.

For further information, please contact:

Artemis Fund Managers Limited

Company Secretary

Telephone: [phone]

6 July 2016

 

END

 

 

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