Final Results

RNS Number : 4256I

Schroder UK Growth Fund PLC

02 July 2013

 

2 July 2013

ANNUAL REPORT AND ACCOUNTS

Schroder UK Growth Fund plc (the "Company") hereby submits its annual financial report for the year ended 30 April 2013 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.1. 

The Company's Annual Report and Accounts for the year ended 30 April 2013 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website http://www.schroderukgrowthfund.com.  Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/4256I_1-2013-7-2.pdf

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at www.hemscott.com/nsm.do.

Enquiries:

John Spedding

Schroder Investment Management Limited                Tel: [phone]

Schroder UK Growth Fund plc

Chairman's Statement

Performance

The year ended 30 April 2013 was a positive period for the Company with the portfolio showing good absolute and relative performance. During the year, the Company's net asset value achieved a total return of 28.0%, while the share price saw a total return of 27.7%. These compare with a total return of 17.8% produced by the FTSE All-Share Index over the same period.

Further comment on performance and investment policy may be found in the Investment Manager's Review.

Change in Portfolio Manager and Investment Policy

In March 2013 the Board was informed of the decision of Richard Buxton and his colleague, Errol Francis, the fund's portfolio managers, to leave Schroders in June 2013. The Board would like to record its appreciation for the management of the portfolio by Richard over the last 10 years. In May 2013, following a thorough review of its investment management arrangements, the Company announced that it had decided to retain Schroders as its manager after the departure of Richard and Errol.

Julie Dean, who will join Schroders in July 2013 as part of the acquisition of Cazenove Capital Holdings Limited by Schroders, will become the Company's lead portfolio manager. Julie is the Citywire AAA-rated manager of the Cazenove UK Opportunities Fund and the Cazenove UK Equity Fund. The Cazenove UK Opportunities Fund has been ranked in the top quartile of its UK Growth peer group over the past 5 years and has also outperformed its benchmark, the FTSE All-Share index, over the same period (source - Lipper: B Acc Class, mid to mid at 31 March 2013, net income reinvested).

The Board was impressed with Julie's consistent performance and pragmatic approach to investment, which combines earnings-based security selection with a top-down business cycle view. Julie avoids style or size bias within the portfolios she currently manages and the same approach will be taken in relation to the Company's portfolio.

The investment policy needs to be adjusted following this appointment. A Circular to shareholders is being distributed with this Annual Report and Accounts giving notice of a General Meeting to be held after the Annual General Meeting on 30 July 2013 at which resolutions will be proposed, inter alia, to amend the investment policy.

As part of the recent review of investment management arrangements, the Board has also negotiated with the manager a reduction in investment management fees and a contribution towards the costs of the proposed change in investment policy. Further details may be found in the Circular.

Earnings and Dividends

The Company's focus continues to be on total return without requiring the Manager to deliver any given level of investment income. When the Company's investment policy was last altered in November 2006, we indicated that the concentration of the portfolio might impact on the Company's ability to pay an increasing dividend stream. This position is not expected to change once the amended investment policy is adopted.

Nevertheless there was again a sharp increase in the Company's investment income for the year to 30 April 2013 and income from the portfolio increased by 19% on the previous year from £5.6 million to £6.7 million. Earnings per share increased by 18.6%, from 3.49p to 4.14p.

The Directors have declared a second interim dividend of 2.25p per share, making a total of 4.00p per share for the year as a whole, an increase of 14.3% over total dividends of 3.50p paid for the previous year. The second interim dividend will be payable on 31 July 2013 to shareholders on the Register on 12 July 2013.

Gearing Policy

During the year, the Company maintained its borrowing facility at £35 million and drawings at £25 million.

The net effective gearing level (which takes account not only of the borrowings but any cash held by the Investment Manager) at the beginning of the year was 7.5% and had decreased to 4.9% by the end of the year. The average net effective gearing level during the year under review was 7.3%. The Company's gearing continues to operate within pre-agreed limits so that net effective gearing does not represent more than 20% of shareholders' funds. It should be noted that the effect of gearing is to amplify underlying investment performance.

Discount Management Policy

The Board continued to operate a formal discount management policy during the year under review and, accordingly, the Company seeks to maintain the discount to the net asset value at which its shares are quoted on the London Stock Exchange at no greater than 5% over the long-term.

The year ended 30 April 2013 was challenging, notwithstanding the improvement in market conditions, and the average discount during the year (based on diluted, capital only net asset values) was 7.0%. When viewed over the long term, the average discount is in line with the target and, during the 5 years ended 30 April 2013, the average discount was 5.5%.

A total of 550,000 shares were purchased for cancellation during the year in support of the Board's discount management policy. The Directors are seeking authority from shareholders for a renewal of the required authorities to purchase shares for cancellation or to hold shares in Treasury for re-issue at a premium to net asset value, to assist with achieving the target long-term discount level established by the formal discount management policy.

From time to time, it will be necessary for the Board to review target levels should general market conditions dictate.

Board Composition

Your Board continues to monitor its composition and independence and, in accordance with its long-term succession plan and having regards to the appropriate balance of skills, experience and diversity of the Board, it will be seeking to replace one of the long-serving Directors between now and the 2014 Annual General Meeting.

General Meeting

A Circular to shareholders will be posted with this Annual Report and Accounts. The Company is seeking shareholder approval for the amendment of the Company's investment policy, the redesignation as Deferred Shares of all the Outstanding Subscription Shares and the cancellation of such Deferred Shares immediately following the Redesignation and to update the Company's Articles of Association (together the "Proposals").

The reasons for the Proposals are (i) to adjust the Company's investment policy following the appointment of a new lead portfolio manager; (ii) to enable the Company to continue to be in a position to be approved as a UK investment trust; and (iii) to amend the Company's Articles of Association to reflect recent changes to the company law and tax regime in the UK applying to investment trust companies.

Outlook

The increase in the stock market over the last year has been impressive, but the scale and pace of the rise must bring with it the likelihood of a consolidation. The issue for the medium term is whether the UK corporate sector can continue to produce higher profits and dividends, thus reassuring investors that shares remain good value even if bond yields move up. The Board's priority is ensuring that the Investment Manager continues to select individual stocks that will do well in this environment.

Annual General Meeting

The Annual General Meeting will be held at 12.00 noon on Tuesday 30 July 2013, and shareholders are encouraged to attend. I hope as many of you as possible will be able to come along. The meeting, as in previous years, will include a presentation by the Investment Manager on the prospects for the UK market and the Company's investment strategy.

Alan Clifton

Chairman

28 June 2013

Investment Manager's Review

Over the 12 months to 30 April 2013 the total return on the Company's diluted net asset value was 28.0%, compared to the total return from the FTSE All-Share index of 17.8%.

Market Background

After a weak start last May, the UK stock market rose in every subsequent month of the Company's fiscal year. This persistence illustrates the improved investor confidence over the last 12-18 months supported in no small part by the liquidity stimulus from central banks worldwide. The accompanying near-zero interest rates and low bond yields have seen investor appetite for equities returning, at least on the margin. On top of this, most corporate sectors - including the UK's - look the strongest part of their national economies, with rising earnings, above-average profit margins, and - for the most part - solid balance sheets.

Sector movements reflected some of this return of confidence, with the best performance coming from financial and consumer sectors that had performed poorly in the earlier weak markets, and the worst performance from commodity stocks such as miners and oil companies.

Performance

The portfolio benefited from the return to favour of some of the domestic sectors (e.g. through the holdings in Taylor Wimpey, Next and Lloyds Banking Group), but also from M&A activity. The largest single contributor to the outperformance was Virgin Media, which agreed a bid from Liberty Group, and there were good contributions from the takeover of Logica and the largest division of Invensys. These more than offset disappointments at - for example - ICAP and Burberry, the latter having finally weakened after being one of the portfolio's best investments for a number of years.

The stock selection outperformance was helped further by the Company's gearing (averaging 7.3% over the year) in the rising market.

Investment Activity and Portfolio Strategy

The takeovers (including those of Charter and Misys earlier) made room for three new holdings: Melrose, which has built up a portfolio of engineering businesses through M&A; Aggreko, a maker of temporary power generators that is benefitting from emerging market demand, and St. James's Place, a financial services group with a partnership of tied consultants providing advice, a business being helped by regulatory changes and rising stock markets.

In aggregate the portfolio remains concentrated in a small number of companies with strong balance sheets, low valuations, robust business models, and significant growth potential that can prosper in a tough corporate environment. The net gearing at year end was 4.9%, slightly lower than 12 months earlier.

Outlook

The headwinds facing the global economy are well understood, and low expectations are priced into many share prices. While companies are still faced with a low-growth environment and the Eurozone's problems remain, this is nothing new. The novelty is that the UK market in aggregate is back to the peaks of six years ago, and the speed with which it has got there could be worrying.

One reassurance is that part of the reason behind recent market rises - the low yield available on less volatile assets like cash - is likely to stay in place: higher UK interest rates still look far off. As helpfully, the market remains one of the cheapest globally, and companies generally continue to take more shareholder-friendly actions.

Schroder Investment Management Limited

28 June 2013

Principal Risks and Uncertainties

The Board has adopted a matrix of key risks which affect its business and a robust framework of internal control which is designed to monitor those risks to enable the Directors to mitigate them as far as possible. A full analysis of the Directors' system of internal control and its monitoring system is set out in the Corporate Governance Statement. The principal risks are considered to be as follows:

Financial Risk

The Company is exposed to the effect of market fluctuations due to the nature of its business. A significant fall in UK equity markets would have an adverse impact on the value of the Company's underlying investments. The Board considers the portfolio's risk profile at each Board meeting and discusses with the Manager appropriate strategies to mitigate any negative impact of substantial changes in markets.

A full analysis of the financial risks facing the Company is set out in note 20 on pages 36 to 39 of the Annual Report.

The Company utilises a credit facility, currently in the amount of £35 million, which increases the funds available for investment ("gearing"). Therefore, in falling markets, any reduction in the net asset value and, by implication, the share price is amplified by the gearing. The Directors keep the Company's gearing under constant review and impose strict restrictions on borrowings to mitigate this risk. In the Circular to shareholders dated 23 October 2006, the Directors indicated that some form of gearing may be employed by the Company from time to time, but they do not anticipate gearing levels in excess of 20% of shareholders' funds. They also indicated that the Company may hold up to 20% of shareholders' funds in cash or cash equivalents. The Company's gearing continues to operate within pre-agreed limits so that actual gearing does not represent more than 20% of shareholders' funds.

Strategic Risk

Over time, investment vehicles and asset classes can become out of favour with investors or may fail to meet their investment objectives. This may be reflected in a wide discount of the share price to net asset value per share. Directors periodically review whether the Company's investment remit remains appropriate and they continually monitor the success of the Company in meeting its stated objectives. Further details may be found under "Investment Performance" and "Discount Management" above.

Accounting, Legal and Regulatory Risk

In order to continue to qualify as an investment trust, the Company must comply with the requirements of Section 1158 of the Corporation Tax Act 2010. Should the Company not comply with these requirements, it might lose investment trust status and capital gains within the Company's portfolio could, as a result, be subject to Capital Gains Tax.

Breaches of the UK Listing Rules, the Companies Acts or other regulations with which the Company is required to comply, could lead to a number of detrimental outcomes and damage the Company's reputation. Breaches of controls by service providers, including the Manager, could also lead to reputational damage or loss.

The Board's system of internal control seeks to mitigate the potential impact of these risks and it also relies on its Manager and other advisers to assist it in ensuring continued compliance.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report, the Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). 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 Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

•        select suitable accounting policies and then apply them consistently;

•        make judgements and accounting estimates that are reasonable and prudent; and

•        state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements respectively.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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

Each of the Directors, whose names and functions are set out in the inside front cover of this report, confirms that, to the best of their knowledge:

•        the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and net profit of the Company; and

•        the Report of the Directors includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

Going Concern

The Directors believe that, having considered the Company's investment objective (see inside front cover), risk management policies (see pages 36 to 39 of the Annual Report), capital management policies and procedures (see pages 39 and 40 of the Annual Report), expenditure projections and the fact that the Company's assets comprise readily realisable securities which can be sold to meet funding requirements if necessary, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. For these reasons, they consider that there is reasonable evidence to continue to adopt the going concern basis in preparing the financial statements.

Income Statement

for the year ended 30 April 2013

			2013			2012
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss
		-	53,290	53,290	-	(13,497)	(13,497)
Income from investments		7,682	-	7,682	6,647	42	6,689
Other interest receivable and similar income		55	-	55	43	-	43
Gross return/(loss)		7,737	53,290	61,027	6,690	(13,455)	(6,765)
Investment management fee		(481)	(1,122)	(1,603)	(428)	(998)	(1,426)
Administrative expenses		(460)	-	(460)	(461)	-	(461)
Net return/(loss) before finance costs
and taxation		6,796	52,168	58,964	5,801	(14,453)	(8,652)
Finance costs		(125)	(292)	(417)	(160)	(372)	(532)
Net return/(loss) on ordinary activities
before taxation		6,671	51,876	58,547	5,641	(14,825)	(9,184)
Taxation on ordinary activities		(5)	-	(5)	(38)	-	(38)
Net return/(loss) on ordinary activities after
taxation		6,666	51,876	58,542	5,603	(14,825)	(9,222)
Return/(loss) per Ordinary share		4.14p	32.23p	36.37p	3.49p	(9.23)p	(5.74)p

Dividends declared in respect of the financial year ended 30 April 2013 amount to 4.00p (2012: 3.50p) per share. Further information on dividends is given in note 8 on pages 31 and 32 of the Annual Report.

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Total column includes all the information that is required to be disclosed in a Statement of Total Recognised Gains and Losses ("STRGL"). For this reason a STRGL has not been presented.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.

The notes on pages 28 to 40 of the Annual Report form an integral part of these accounts.

Reconciliation of Movements in Shareholders' Funds

for the year ended 30 April 2013

		Called-up		Capital	Share	Warrant
		share	Share	redemption	purchase	exercise	Capital	Revenue
		capital	premium	reserve	reserve	reserve	reserves	reserve	Total
		£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 April 2011		39,264	2,820	18,944	81,089	417	85,021	4,586	232,141
Net (loss)/return on ordinary
activities		-	-	-	-	-	(14,825)	5,603	(9,222)
Ordinary dividends paid
in the year		-	-	-	-	-	-	(5,171)	(5,171)
Repurchase and cancellation
of the Company's own
Ordinary shares		(465)	-	465	(2,323)	-	-	-	(2,323)
Conversion of Subscription
shares into Ordinary shares		(74)	74	-	-	-	-	-	-
Issue of Ordinary shares
on exercise of Subscription shares		1,844	6,935	-	-	-	-	-	8,779
At 30 April 2012		40,569	9,829	19,409	78,766	417	70,196	5,018	224,204
Net return on ordinary
activities		-	-	-	-	-	51,876	6,666	58,542
Ordinary dividends paid
in the year		-	-	-	-	-	-	(6,033)	(6,033)
Repurchase and cancellation
of the Company's own
Ordinary shares		(137)	-	137	(695)	-	-	-	(695)
Cancellation of Subscription
shares		(213)	-	213	-	-	-	-	-
Conversion of Subscription
shares into Ordinary shares		(1)	1	-	-	-	-	-	-
Issue of Ordinary shares
on exercise of Subscription
shares		11	45	-	-	-	-	-	56
At 30 April 2013		40,229	9,875	19,759	78,071	417	122,072	5,651	276,074

The notes on pages 28 to 40 of the Annual Report form an integral part of these accounts.

Balance Sheet

at 30 April 2013

		2013	2012
		£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		288,229	240,100
Current assets
Debtors		2,038	1,549
Cash and short-term deposits		11,391	8,083
		13,429	9,632
Current liabilities
Creditors: amounts falling due within one year		(25,584)	(25,528)
Net current liabilities		(12,155)	(15,896)
Net assets		276,074	224,204
Capital and reserves
Called-up share capital		40,229	40,569
Share premium		9,875	9,829
Capital redemption reserve		19,759	19,409
Share purchase reserve		78,071	78,766
Warrant exercise reserve		417	417
Capital reserves		122,072	70,196
Revenue reserve		5,651	5,018
Total equity shareholders' funds		276,074	224,204
Net asset value per Ordinary share (undiluted)		171.56p	138.89p
Net asset value per Ordinary share (diluted)		171.56p	137.73p

These accounts were approved and authorised for issue by the Board of Directors on 28 June 2013 and signed on its behalf by:

Alan Clifton

Chairman

The notes on pages 28 to 40 of the Annual Report form an integral part of these accounts.

Registered in England and Wales

Company registration number: 2894077

Cash Flow Statement

for the year ended 30 April 2013

		2013	2012
		£'000	£'000
Net cash inflow from operating activities		5,067	4,644
Servicing of finance
Interest paid		(423)	(529)
Net cash outflow from servicing of finance		(423)	(529)
Taxation
Overseas tax recovered/(paid)		24	(86)
Investment activities
Purchases of investments		(31,790)	(37,574)
Sales of investments		37,102	37,105
Special dividend received allocated to capital		-	42
Net cash inflow/(outflow) from investment activities		5,312	(427)
Dividends paid		(6,033)	(5,171)
Net cash inflow/(outflow) before financing		3,947	(1,569)
Financing
Repurchase and cancellation of the Company's own Ordinary shares		(695)	(2,323)
Issue of Ordinary shares on exercise of Subscription shares		56	8,779
Net cash (outflow)/inflow from financing		(639)	6,456
Net cash inflow in the year		3,308	4,887

The notes on pages 28 to 40 of the Annual Report form an integral part of these accounts.

Notes to the Accounts

1. Accounting Policies

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP") and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the "SORP") issued by the Association of Investment Companies in January 2009. All of the Company's operations are of a continuing nature.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments at fair value.

The policies applied in these accounts are consistent with those applied in the preceding year.

2. Income

	2013	2012
	£'000	£'000
Income from investments:
UK dividends	7,503	6,355
Scrip dividends	179	292
	7,682	6,647
Other interest receivable and similar income:
Deposit interest	20	43
Underwriting commission	35	-
	55	43
Total income	7,737	6,690
Capital:
Special dividend allocated to capital	-	42

3. Investment management fee

		2013			2012
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Management fee	481	1,122	1,603	428	998	1,426

The basis for calculating the investment management fee is set out in the Report of the Directors on pages 13 and 14 of the Annual Report.

4. Return/(loss) per Ordinary share

		2013	2012
		£'000	£'000
Revenue return		6,666	5,603
Capital return/(loss)		51,876	(14,825)
Total return/(loss)		58,542	(9,222)
Weighted average number of Ordinary shares in issue during the year		160,930,746	160,680,522
Revenue return per share		4.14p	3.49p
Capital return/(loss) per share		32.23p	(9.23)p
Total return/(loss) per share		36.37p	(5.74)p

5. Net asset value per Ordinary share

		2013	2012
Undiluted:
Net assets attributable to the Ordinary shareholders (£'000)		276,074	224,204
Ordinary shares in issue at the year end		160,917,184	161,423,790
Net asset value per Ordinary share		171.56p	138.89p
Diluted:
Net assets attributable to the Ordinary shareholders (£'000)		276,074	251,801
Ordinary shares in issue at the year end assuming exercise of Subscription shares		160,917,184	182,816,987
Net asset value per Ordinary share		171.56p	137.73p

The diluted net asset value per Ordinary share at 30 April 2012 assumes that all outstanding Subscription shares were converted into Ordinary shares at that date. There were no dilutive shares in issue at 30 April 2013.

6. Transactions with the Manager

The Company has appointed Schroder Investment Management Limited (the "Manager"), a wholly owned subsidiary of Schroders plc, to provide investment management, accounting, secretarial and administration services. If the Company invests in funds managed or advised by the Manager or any of its associated companies, those funds are excluded from the assets used for the purposes of the management fee calculation and therefore attract no fee. Under the terms of the Investment Management Agreement, the Manager is also entitled to receive a secretarial fee. Details of the Investment Management Agreement are given in the Report of the Directors on pages 13 and 14 of the Annual Report.

The management fee payable in respect of the year ended 30 April 2013 amounted to £1,603,000 (2012: £1,426,000), of which £438,000 (2012: £358,000) was outstanding at the year end. The total secretarial fee. including VAT, payable to Schroders in respect of the year ended 30 April 2013 amounted to £85,000 (2012: £82,000), of which £21,000 (2012: £29,000) was outstanding at the year end.

7. Status of announcement

2012 Financial Information

The figures and financial information for 2012 are extracted from the published Annual Report and Accounts for the year ended 30 April 2012 and do not constitute the statutory accounts for that year. The Annual Report and Accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2013 Financial Information

The figures and financial information for 2013 are extracted from the Annual Report and Accounts for the year ended 30 April 2013 and do not constitute the statutory accounts for the year. The Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

 

END

 

 

FR NKBDBNBKDCOK