Update re Proposals & Circular

RNS Number : 0472O

Artemis Alpha Trust PLC

15 May 2018

 

LEI: 549300MQXY2QXEIL3756

15 may 2018

artemis alpha trust plc

Update re. Proposals and Posting of Shareholder Circular

Introduction

The Board announced on 11 April 2018 the outcome of its strategic review of the Company, which had been undertaken in advance of the Continuation Resolution due to be proposed at the Company's AGM to be held in October 2018.

The Strategic Review considered all aspects of the Company and took into account the views expressed by investors representing approximately 50% of the Ordinary Shares (excluding Treasury Shares) not held by investors connected with the Investment Manager.  As a result of the Strategic Review, the Board is proposing that, subject to obtaining the requisite Ordinary Shareholder approvals:

·           the Company should adopt a new investment objective and policy; and

·           the Continuation Resolution to be proposed at this year's AGM (and, if passed, at every fifth subsequent AGM) should be replaced by triennial liquidity events, commencing in 2021.

In addition, other changes are proposed or have been made as a consequence of the Strategic Review:

·           subject to Ordinary Shareholders' approving the adoption of the New Investment Objective and Policy, in future the Company's dividend policy will be linked to inflation rather than target a specific annual growth rate; and

·           a tiered basis has been introduced to the rate of the annual management fee payable to the Investment Manager and the performance fee arrangements have been removed.

These changes, full details of which were set out in the Company's announcement on 11 April 2018, do not require Shareholder approval. 

The Board is also proposing that, subject to obtaining the requisite Shareholder approvals, the outstanding Subscription Shares, the subscription rights of which lapsed earlier this year, should be cancelled. 

Background to the Proposals and Related Matters

The Existing Articles require a resolution to continue the Company as an investment trust to be proposed at the Company's AGM in 2018 and, if that resolution is passed, at every fifth AGM thereafter.  As shown in the following table, the Company's investment performance has been strong over the long term, but disappointing over the medium term.  Encouragingly, short-term performance has improved significantly.

Performance to 11 May 2018 (Total Return - %)
	6 Months	1 Year	3 Years	5 Years	10 Years	Since 1 June 20031
ATS - Ordinary Shares
NAV	10.5	11.9	26.3	41.6	79.0	559.3
Share price	13.0	16.5	29.1	24.8	63.9	481.0
FTSE All-Share Index	6.0	8.8	24.7	45.5	92.7	263.9

Sources: Artemis Fund Managers Limited, Datastream

Note: ¹The date of the Investment Manager's appointment.

Against the backdrop of this performance and the persistently wide discount at which the Ordinary Shares have traded relative to their NAV in recent years (an average discount of 20.6% over the three years ended 11 May 2018), the Board decided to undertake the Strategic Review in order to assess whether, in the Board's opinion, the Company should continue as an investment trust in its current form.  The Strategic Review, which was carried out with the assistance of the Company's advisers, considered all aspects of the Company, including the factors that have contributed to the Company's investment performance (positive and negative) and Ordinary Share price discount.

As can be seen from the following table, over recent years the Company's unquoted investments have generally hindered the Company's performance relative to the FTSE All-Share Index, whilst the Company's listed investments have generally outperformed that index.  For example, over the three years ended 30 April 2018, 80.1% of the NAV was invested in quoted equities that contributed 34.4% to the NAV total return per Ordinary Share, whilst 27.6% was invested in unquoted equities which reduced the NAV total return per Ordinary Share by 4.8%.  Over the period, the NAV total return per Ordinary Share was 24.5%, outperforming the FTSE All-Share Index's total return of 22.5%.

Annual Returns (Total Returns - %)
	2012	2013	2014	2015	2016	2017	2018 YTD1	1 Year1	3 Years1	5 Years1
Average ATS portfolio weightings2
Listed investments	84.7	83.8	78.5	73.7	79.8	82.6	83.5	82.9	80.1	79.7
Unquoted investments	27.3	33.7	37.1	34.4	28.0	25.2	24.0	24.9	27.6	31.1
Contribution to ATS's NAV total return per Ordinary Share
Listed investments	20.8	8.8	-4.7	3.5	7.4	17.6	5.4	12.8	34.4	42.1
Unquoted investments	1.3	-2.8	8.6	-8.2	-1.4	1.8	-0.2	-1.0	-4.8	6.1
Other3	-1.3	-0.6	-1.2	-1.0	-0.4	-2.6	-0.7	-2.1	-5.1	-8.2
NAV per Ordinary Share	20.8	5.4	2.7	-5.7	5.6	16.8	4.5	9.7	24.5	40.0
FTSE All-Share Index total return	12.3	20.8	1.2	1.0	16.7	13.1	-0.9	8.2	22.5	45.6

Source: Artemis Fund Managers Limited

Notes: ¹To 30 April 2018.  ²As a percentage of ATS's net assets (aggregate weightings in excess of 100% are due to the use of borrowings).  ³These include the impact of Ordinary Share buy-backs and the exercise of subscription rights conferred by the Subscription Shares, management fees, interest on borrowings and other costs and assumes dividends reinvested.

During the Investor Meetings, a number of the investors expressed the view that the Company's exposure to unquoted investments is a key factor for the Ordinary Shares trading at a wide discount to their NAV.  The Board previously set a target of reducing the exposure to unquoted companies to below 10% by the time of the Company's AGM later this year.  Notwithstanding the current discount, most investors expressed a preference for maximising value ahead of timing when reducing the Company's exposure to unquoted investments.

As at 11 May 2018, 20.6% of the Company's total assets was invested in unquoted companies and it is unlikely that the Board's 10% target will be met by the time of this year's AGM.  However, the Investment Manager has a clear plan to reduce the Company's unquoted exposure.  So far in 2018, two unquoted investments have been disposed.  Several more unquoted investments, equating to approximately 4.8% of the Company's total assets, are in some form of realisation process (although there is no guarantee that these processes will result in realisations being achieved).  The Board and the Investment Manager remain committed to reducing the Company's exposure to unquoted companies so that the 10% target is reached as soon as practicable without undertaking realisations in a suboptimal manner.

Feedback from the Investor Meetings was that voting against the Continuation Resolution to be proposed at this year's AGM could potentially reduce value for Ordinary Shareholders in view of the Company's current exposure to unquoted investments.  A number of investors also expressed a desire for the Company to offer regular liquidity events, providing Ordinary Shareholders with opportunities to realise at least part of their investment. 

Having reviewed the factors that have contributed to the Company's investment performance and Ordinary Share price discount and having taken into account the feedback from the Investor Meetings, the Board concluded that it would be desirable to propose certain changes. In particular:

·           the adoption of a new investment objective and policy to allow the Investment Manager to implement fully the strategy that has contributed to the Company's improved performance in recent years - a key outcome of this change will be a more liquid and concentrated portfolio with greater scope to make overseas investments; and

·           replacing the Continuation Resolution due to be proposed at this year's AGM (and, if passed, at every fifth AGM thereafter) with triennial liquidity events.

Investment Objective, Policy and Approach

The Company's current investment objective is to achieve above average rates of total return over the longer term and to achieve a growing dividend stream.  The Board is proposing that the investment objective is revised so that the Company will aim to provide long-term capital and income growth by investing predominantly in listed companies and to achieve a NAV total return greater than the total return of the FTSE All-Share Index. 

The Investment Manager currently has an unconstrained and opportunistic investment approach with a UK small capitalisation bias.  Under the New Investment Objective and Policy:

·           it is intended that potential investments will be considered across a wider range of market capitalisations, which should increase the underlying liquidity of the Company's portfolio;

·           the concentration of the portfolio will also increase to reflect a higher conviction approach; and 

·           the allocation to overseas equities may become larger as the Company's fund management team seeks to leverage the Investment Manager's access to companies across multiple geographies.  However, at any time, the majority of the portfolio is expected to be invested in UK listed companies due to the proximity of the Investment Manager to this market and access to company management teams.

The New Investment Objective and Policy will permit the Company to invest up to 10% of its total assets in unquoted companies, excluding follow-on investments that may be made in any existing unquoted investee company in order to preserve the Company's economic interests.  The 10% limit will be measured at the time of investment.  Any new or follow-on investments in unquoted companies will require prior Board approval and are expected only to be made in exceptional circumstances.  In any event, no new unquoted investments may be made until such time as the Company's current exposure to unquoted investments is reduced to below 10% of the Company's total assets.

The following table illustrates the potential impact that the New Investment Objective and Policy may have on the Company's portfolio. 

Illustrative Portfolio Characteristics Based on Current Investment Policy and Proposed New Investment Policy
	Current Portfolio1	Future Portfolio2
Number of holdings	87	30 - 60
Weighting of top 10 investments	36%	40 - 50%
Unquoted weighting	21%	<10%
Large cap weighting	10%	25 - 50%
Overseas weighting	12%	0 - 30%

Notes:

¹As at 11 May 2018, based on total assets.

²The "Future Portfolio" statistics, which are based on total assets, are illustrative only and not minimums or maximums (save in relation to unquoted weightings measured at the time of investment).  The proposed new investment policy contains no pre-defined maximum or minimum exposure levels (save in relation to unquoted investments or individual investments).  The Board will monitor the composition of the Company's portfolio to ensure that it is invested and managed in a manner consistent with spreading investment risk.

In implementing the New Investment Objective and Policy, the Investment Manager will seek to identify and invest in companies with three defining characteristics:

·           Attractive valuations: the Investment Manager adopts a value-focused approach to evaluate whether, in its opinion, the fair value of a company is significantly in excess of its current share price.  This involves analysing whether profits are temporarily or cyclically supressed and/or whether industry or company valuation multiples are depressed for factors that may correct over time.

·           Strong business model and favourable long-term industry fundamentals: this requires the Investment Manager to form a view on the predictability and growth of profits and cash flows of a business/industry with the objective of owning shares in businesses for the long term.  This involves looking for industries with qualities such as structural growth, low regulation and high market concentration.  Furthermore, it involves identifying companies that may achieve high returns on invested capital, pricing power and positive cash flow generation. 

·           Outstanding management: the Investment Manager looks for high-grade management who are skilled operators and intelligent allocators of capital and, as a result, are likely to produce outsized returns for their shareholders.  The Investment Manager seeks to identify such management by engaging in company meetings, participating in site visits and conducting primary research to evaluate the view of customers and suppliers.

By monitoring a wide range of listed companies and utilising the knowledge and access across the Investment Manager's investment resources, the objective of the Company's fund management team is to utilise a consistent process to build a pipeline of potential investments in which the Company may invest when, in the Investment Manager's opinion, the fair value of the relevant company is significantly in excess of its current share price.

Continuation Resolutions and Triennial Liquidity Events

The Board is proposing to replace the Continuation Resolution due to be proposed at this year's AGM (and, if passed, at every fifth AGM thereafter) with triennial liquidity events.  The liquidity events will be implemented in the form of tender offers.

The tender offers will be made every three years, commencing in 2021, with each tender offer being for up to 25% of the Ordinary Shares then in issue (excluding Treasury Shares), save that the Board may, at its sole discretion, decide not to proceed with a tender offer if the Ordinary Shares are trading at a premium to the estimated tender price. 

Unless the Board elects to use a tender realisation pool, the tender price will be the prevailing NAV (cum-income) per Ordinary Share less the costs of the relevant tender offer and less a discount of 3%.  The Board may elect, at its sole discretion, to use a tender realisation pool with a view to protecting the cash value to be returned to Ordinary Shareholders participating in the relevant tender offer, while at the same time protecting the NAV per Ordinary Share of continuing Ordinary Shareholders.  If the Board elects to use a tender realisation pool, assets (less the relevant tender offer costs and less a discount of 3%) will be allocated (on a pro rata basis) to the tender realisation pool, and those assets will be realised in an orderly manner with the tender price calculated by reference to the net realised proceeds of that pool.

The replacement of Continuation Resolutions with regular tender offers is conditional on Ordinary Shareholders approving the adoption of the New Articles.  Each tender offer will also require Ordinary Shareholder approval, which will be sought at or around the time of the Company's AGM in the year in which the tender offer is being made.

Cancellation of Outstanding Subscription Shares

The Subscription Shares were issued in 2010 and conferred the right (but not the obligation) to subscribe for one Ordinary Share at a price of 345p on the last business day in each of June and December each year between 31 December 2010 and 31 December 2017. 

Following the final subscription date of 29 December 2017, there are 6,853,639 Subscription Shares in issue, the subscription rights of which had not been exercised.  As those rights have now lapsed and the Subscription Shares have no voting rights or rights to receive any dividends or return of capital (beyond the right to receive the nominal value of 1p per Subscription Share on any winding-up of the Company), the Subscription Shares no longer have any purpose or meaningful rights and are now valueless.  However, the Subscription Shares are ordinary share capital for the purposes of section 1119 of the Corporation Tax Act 2010. Accordingly, in order to maintain the Company's UK investment trust status, it would be necessary for the Company to maintain the existing admission of the Subscription Shares to trading on the London Stock Exchange's Main Market.  This is currently suspended and there is no certainty that such a suspended admission to trading can be maintained on an indefinite basis.

In order to remove the continuing risk to the Company's status as a UK investment trust in the event that the admission to trading of the Subscription Shares on the London Stock Exchange's Main Market is cancelled in the future, the Board is proposing that the Subscription Shares will be redesignated as Deferred Shares.  The Deferred Shares will have substantially the same rights that the Subscription Shares have but, because they will also confer entitlements to a dividend at a fixed rate of 0.1% of their nominal value and to be paid only the nominal value of 1p per Deferred Share on any winding-up of the Company, the Deferred Shares will not constitute ordinary share capital for the purpose of the investment trust eligibility conditions and, accordingly, there will be no continuing requirement to maintain an admission of the Deferred Shares to trading on the London Stock Exchange's Main Market (or another regulated market).

As the Deferred Shares will be valueless (save for their entitlements to a dividend at a fixed rate of 0.1% of their nominal value and to be paid the nominal value of 1p per Deferred Share on any winding-up of the Company), the Board considers it preferable to remove the Deferred Shares from the Company's balance sheet.  Accordingly, it is also proposed that the Company will have the right to repurchase compulsorily all of the Deferred Shares for cancellation for an aggregate consideration equal to their nominal value of 1p per share immediately following the Redesignation.  The consideration payable by the Company in respect of the Repurchase and Cancellation will be approximately £68,536.

If the Subscription Share Resolutions are passed, the Company will repurchase all of the Deferred Shares immediately following the Redesignation and the Deferred Shares will then be cancelled by the Company.  As a consequence, although the Deferred Shares will confer an entitlement to a dividend at a fixed rate of 0.1% of their nominal value, no dividends will be paid in respect of the Deferred Shares prior to their Repurchase and Cancellation.  The consideration for the repurchase of the Deferred Shares shall be paid to the persons entitled thereto at the risk of such persons within 56 days of such purchase, provided that entitlements of less than £5.00 shall be retained for the benefit of the Company.

Immediately following the Redesignation and subsequent Repurchase and Cancellation, the Company's issued share capital will only comprise Ordinary Shares.

If the Subscription Share Resolutions are passed, the listing of the Subscription Shares in the standard segment of the Official List of the UK Listing Authority and admission of the Subscription Shares to trading on the London Stock Exchange's Main Market is expected to be cancelled at 8.00 a.m. on Wednesday, 20 June 2018.

Adoption of New Articles of Association

The Existing Articles require a Continuation Resolution to be proposed at this year's AGM (and, if passed, at every fifth subsequent AGM).  Accordingly, the proposal to replace the Continuation Resolutions with triennial liquidity events, as described above, requires the Existing Articles to be amended.  As the Existing Articles were adopted in 2012, the Directors have decided to take this opportunity to propose the adoption of the New Articles, rather than amending the Existing Articles. 

Benefits of the Proposals and Related Matters

The Board believes that the Proposals and related matters are in the best interests of Shareholders as a whole for the following reasons:

·           the New Investment Objective and Policy should result in sustained improved investment performance over the medium to long-term;

·           triennial tender offers will provide Ordinary Shareholders with regular opportunities to realise at least 25% of their investment in the Company at prices close to the underlying NAV;

·           the new dividend policy should result in dividends growing, year on year, at a rate greater than inflation;

·           cancellation of the Subscription Shares will remove the risk to the Company's investment trust status in the event that the admission to trading of the Subscription Shares on the London Stock Exchange's Main Market was cancelled in the future; and

·           the combined effect of the Proposals and related matters should lead to the discount at which the Ordinary Shares trade relative to their NAV narrowing over time.

Shareholder Meetings and Circular

A general meeting of the Company to consider an ordinary resolution to approve the adoption of the New Investment Objective and Policy and special resolutions to adopt the New Articles and cancel the Subscription Shares has been convened for Thursday, 7 June 2018.  A separate class meeting of Subscription Shareholders to approve the cancellation of the Subscription Shares has also been convened for Thursday, 7 June 2018.  The Directors are unanimously recommending that Shareholders vote in favour of the resolution to be proposed at the Shareholder Meetings.

A circular containing further details of the Proposals and related matters and the notices convening the Shareholder Meetings will be posted to Shareholders later today.  Copies of that circular will be available shortly at www.artemisalphatrust.co.uk and at www.morningstar.co.uk/uk/nsm.

Enquiries

Duncan Budge	Chairman	T: [phone]
John Dodd	Artemis Fund Managers Limited	T: [phone]
Sue Inglis	Cantor Fitzgerald Europe	T: [phone]

Definitions

The following definitions apply throughout this announcement unless the context otherwise requires:

"AGM"	annual general meeting
"Board"	the board of Directors, including any duly authorised committee thereof
"Company" or "ATS"	Artemis Alpha Trust plc
"Continuation Resolution"	an ordinary resolution to resolve that the Company continues as an investment trust
"Deferred Shares"	deferred shares of 1p each in the capital of the Company arising on the Redesignation of the Subscription Shares
"Directors"	the directors of the Company
"Existing Articles"	the articles of association of the Company at the date of this announcement
"General Meeting"	the general meeting of the Company convened for Thursday, 7 June 2018 at 10.30 a.m.
"Investment Manager"	Artemis Fund Managers Limited
"London Stock Exchange's Main Market"	the main market for listed securities of London Stock Exchange plc
"New Articles"	the proposed new articles of association of the Company that will be adopted and amended if the relevant resolutions are passed at the Shareholder Meetings
"NAV"	net asset value
"New Investment Objective and Policy"	the proposed new investment objective and policy of the Company referred to in this announcement
"Ordinary Shareholders"	holders of Ordinary Shares
"Ordinary Shares"	ordinary shares of 1p each in the capital of the Company
"Proposals"	the proposals (i) to adopt the New Investment Objective and Policy, (ii) to adopt the New Articles and (iii) to cancel the outstanding Subscription Shares, details of which are set out in this announcement
"Redesignation"	the proposed conversion and redesignation of the outstanding Subscription Shares as Deferred Shares, as described in this announcement
"Repurchase and Cancellation"	the proposed repurchase and cancellation of the Deferred Shares, immediately following the Redesignation, by the Company, as described in this announcement
"Shareholder Meetings"	the General Meeting and/or the Subscription Shareholders' Meeting, as the context may require
"Shareholders"	Ordinary Shareholders and/or Subscription Shareholders, as the context may require
"Shares"	Ordinary Shares and/or Subscription Shares, as the context may require
"Sterling"	pounds sterling, being the lawful currency of the United Kingdom
"Strategic Review"	the strategic review of all aspects of the Company undertaken by the Board, with the assistance of the Company's advisers, details of which are set out in this announcement
"Subscription Shareholders"	holders of Subscription Shares
"Subscription Shareholders' Meeting"	the separate class meeting of Subscription Shareholders convened for Thursday, 7 June 2018 at 10.35 a.m. (or, if later, as soon as reasonably practicable following the conclusion or adjournment of the General Meeting), or any adjournment of that meeting
"Subscription Share Resolutions"	the relevant resolutions relating to the cancellation of the Subscription Shares to be proposed at the Shareholder Meetings
"Subscription Shares"	the subscription shares of 1p each in the capital of the Company
"Treasury Shares"	Ordinary Shares held in treasury
"UK Listing Authority"	the Financial Conduct Authority acting in its capacity as the competent authority for listing for the purposes of Part VI of the Financial Services and Markets Act 2000

 

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