Final Results

RNS Number : 1036P

Downing Strategic Micro-Cap IT PLC

24 May 2018

 

Downing Strategic Micro-Cap Investment Trust PLC

Final Results for the period 17 February 2017 to 28 February 2018

Company number: 10626295

(the "Company")

The investment objective of the Company is to generate capital growth for shareholders over the long term, from a focused portfolio of UK micro-cap companies (those whose market capitalisations are under £150 million at the time of investment) targeting a compound return of 15% per annum over the long term

The Directors of Downing Strategic Micro-Cap Investment Trust PLC are pleased to announce the Company's results for the period 17 February 2017 to 28 February 2018.

The key points are as follows:

·      The Company raised £54.5 million (net) in May 2017 and over the course of the period to 28 February 2018 investments were made in the equity and debt instruments of ten businesses;

·      The investment rate is encouraging. Post period end, as at 29 March 2018, the Company announced that it was 66.2% invested;

·      Excluding Real Good Food, the underlying operational performance of all portfolio holdings is in line with our expectations;

·      A number of holdings have taken decisive strategic action to increase their intrinsic value since investment;

·      Real Good Food is now fully funded with a strengthened management team. We are confident that we should realise a positive outcome for our investors and initial feedback from the new management team has been positive;

·      The portfolio comprises a diverse spread of businesses which we believe are at a transformational stage, and capable of delivering exceptional long term shareholder returns.

Performance	28 February 2018
Net assets (£'000)	51,744
Net asset value (NAV) per Ordinary Share	93.06p
Mid market price per Ordinary Share	93.60p
Premium	0.58%
Revenue return per Ordinary Share	(0.03p)
Capital return per Ordinary Share	(6.22p)
Total return per Ordinary Share	(6.25p)
	%
Decrease in NAV since admission (9 May 2017)	(6.94)
Decrease in share price since admission (9 May 2017)	(6.40)

Chairman's statement

Your Company made ten investments in the ten months to 28 February 2018. Along with other Downing funds, that makes a portfolio of strategic holdings where stakes of between 22.80% and 5.22% of the underlying companies are held. The Company's holdings are set out below.

Nine of those investments we would make again today. All have seen positive developments in intrinsic value through organic growth or decisive, strategic, management action, which we have supported or are on a path to supporting. As value investments these holdings are attractive, and the Manager calculates that the discount to intrinsic value has increased by approximately 10% since investment was made, reflecting the progress of the portfolio.

One holding has been disappointing, to put it politely, but the structure of our investment has allowed us to drive change throughout that business. Board members and top management have been replaced, the business has been refocused, and we believe that it should generate a gain for our shareholders in the medium term.

Returning to the nine holdings, in our view these businesses represent even better value today than when we initially invested. Although wider recognition of that may call for patience, the scope is greater with strategic holdings in well managed micro-caps. We hold significant positions in companies that we believe have competent management, growing markets, sound and often transformational strategies, good margins, healthy operating cash flows, and who appreciate our support and influence. Where key qualities are lacking, we encourage the necessary strategic action or improvement in performance. That gives us confidence that over the longer term intrinsic value will become evident and our investments will either be revalued or the companies acquired.

As to our 'disappointment', we took a board seat suspecting that governance could be improved. What we did not expect to find was both bad governance and false accounting. A disproportionate amount of time has been taken up on this investment in unearthing wrongdoing and a lack of internal controls, replacing the CEO, the Audit Committee Chairman, the Finance Director and some senior management, replacing the auditors, resetting strategy and refinancing the company. I comment later on the importance of competent, thoughtful, engaged directors, and on the need for better oversight of companies.

That instance apart, the continuing principles of the Manager's stock selection (set out in more detail in the Manager's Report) have evidently worked well in identifying investment opportunities that prove to be worthwhile. The Board continues to be impressed with the management team, led with vigour by Judith MacKenzie, and there is a good, constructive relationship between Board and Manager on both potential investments and the portfolio's performance.

In October 2017, in our interim report, I set out the importance that we place on governance in our investments. Our expectations draw heavily on the General Duties of Directors, set out in the Companies Act and company law, on the UK Corporate Governance Code and on the Quoted Companies Alliance Code. We repeat those expectations in this Annual Report, and may well do in our future reports. Correct governance of companies is critical to their corporate health and investors' confidence. The core of good governance is directors actively 'directing', striving for the success of the companies of which they are fortunate enough to be directors, overseen by nominated advisers (Nomads) who should be doing more than going through the motions, and by an FCA and LSE AIM team that should monitor with determination. As investors we should not have to be as concerned as we are about that.

Share price and NAV

The net result for the first ten months has been a decline in our NAV from 98p to 93p. While disappointing, strategic investments do tend to have some element of drawdown in their early stages. As the Manager demonstrates, the intrinsic value of the portfolio has actually increased across a number of holdings but shareholders will only see that come through in the NAV if either the true value of investee companies is recognised by the market, or they are acquired. One or other of those outcomes is likely in every case and, crucially, we invest as a catalyst to facilitate that. The Company's share price has kept close to the NAV. I have said before that we wish to keep any discount to a minimum and, bar market crises, we will seek to do so.

Shareholders

I have already started meeting larger shareholders and as soon as these reports and accounts are despatched in May I will be seeking to meet more later in that month and into June. Your Board is committed to shareholder engagement. We now produce an extensive quarterly newsletter (see our website) and monthly factsheets will start being issued in June. To receive regular email news and updates please visit www.downingstrategic.co.uk and register.

May I also encourage shareholders to come to our investor event and AGM on 27 June 2018 at 2:30pm. Details of the Annual General Meeting are given below.

Board

On 4 April 2018 Diana Hunter resigned from the Board. We are seeking to find as strong and spirited a replacement.

Hugh Aldous

Chairman

Investment Manager's report

Investment strategy

We invest in publicly quoted businesses typically below £150 million market cap at the time of investment. Rather than passively investing, we aim to take large equity stakes which allows us to implement strategic initiatives in order to grow the value of our investment over time. We are not 'activists', rather we prefer to foster a constructive relationship with our management teams and other stakeholders.

We are long term value investors meaning that we seek to hold companies for many years, supporting management teams as they deliver on their strategy. We also try to acquire our shareholding at a significant discount to intrinsic value which, in turn, we hope will steadily grow over time. Before investing, we undertake an extensive due diligence process which typically involves desk work, as well as site visits and meeting the company's executive and non-executive directors of the business.

When valuing businesses we typically look for sustainable and growing free cash flows. Part of this requirement is that we should be able to forecast cash flow and capital expenditure. We tend to avoid highly speculative businesses in sectors such as mining, oil and gas, and biotech for this reason. All of our investment decisions are based around the margin of safety in our intrinsic valuation versus our entry price. In addition to this process, which values the operations of the business, we also overlay a scenario analysis which looks at various outcomes including downside and upside, rerating, and trade exits. Given the inefficient nature of smaller companies, we typically seek to invest in businesses where we deem some potential for a trade exit as we cannot always be sure that our intrinsic value will be realised.

We believe that smaller companies are capable of delivering the highest risk-adjusted returns for our strategy. These companies are typically under researched which can lead to large pricing inefficiencies. Our portfolio is concentrated and seeks to hold between 12-18 holdings when fully invested. We believe that this concentration will allow us greater time to engage constructively with management teams and help reduce the overall risk of our long-term holdings.

Performance review

The Company's NAV performance has declined 6.94% over the period to 28 February 2018, due to: 1) expected or unexpected share price declines where a company in the portfolio is in a highly strategic turnaround situation; 2) unexpected share price declines where the company has missed short-term expectations; 3) unexpected share price declines where there is negative sentiment; and 4) share price appreciation, which is outweighed by the combination of the other points above.

Real Good Food ('RGD') is a strategic turnaround situation. Redhall ('RHL'), despite large new orders, has failed to meet short term expectations on project delivery and is also suffering from negative sentiment. Gama ('GMAA') and Ramsdens ('RFX') have both performed well, delivering unrealised gains to date. This includes the Gama placing shares which we subscribed for in the fundraise in early-2018, but which had not yet been issued at the date of the statement of financial position. We believe that the other companies fall under the negative sentiment category, and in some cases this sentiment has been materially negative, such as with AdEPT ('ADT'), which is performing well, and Braemar ('BMS').

Real Good Food continues to take up a significant amount of the Managers time as we seek to drive a favourable outcome for our investors and for the company. Since we initially invested, we have taken a board seat and have helped provide new management and sought to improve corporate governance practises. Two of its divisions - Renshaw, the decorations business, and Brighter Foods, a contract supplier to Slimming World - continue to trade in line with the Manager's expectations. Haydens, the bakery business, where there has been significant investment in new plant and equipment to service contracted demand, is likely to be facing headwinds from commodity prices. However, the investment made should allow management to capitalise on previous operational inefficiencies. Overall the management are seeking to implement a number of self-help measures that include the disposal of non-core businesses (Garretts Ingredients has already been sold). We believe that we will drive a favourable outcome from our investment which is likely to be achieved through a trade exit.

Post period end, a funding of up to £8.7 million has been announced by Real Good Food. This will satisfy outstanding liabilities and fund the business over the long term. The Company has supported this funding; the terms are attractive and should maximise both the security held through loan notes and the equity position due to the conversion terms proposed.

Redhall is at an interesting juncture as its order book and pipeline continue to grow, although this has yet to be adequately reflected in the share price. Admittedly, investors are likely becoming fatigued at the recent delays and some investors are easily shaken out by these short-term disappointments. Unfortunately, delays are not uncommon in businesses with exposure to high-value, critical infrastructure projects. We believe that this remains an attractive company operating in niche end markets which aim to deliver impressive returns over the long term. This is supported by the most recent contract wins with Cavendish Nuclear Limited and Hinkley Point C. Post period end, Redhall announced that its orderbook had grown to £35 million, excluding the Cavendish teaming agreement valued at £18 million over three years. Over the long term we expect that the market will realise the potential in Redhall's quality order book and the shares will subsequently re-rate or that it will be acquired. In the meantime, we will take advantage of what we believe is a pricing anomaly.

Gama is delivering exactly on our investment case. In February 2018, the company raised £48 million to deliver a number of organic growth initiatives in Asia, the Middle East, and the US, as well as further inorganic growth initiatives. As part of this, it also gained a material strategic investor in Hutchison Capital Holdings Limited who now own 21% of the equity. The Board was also strengthened in the period. We believe that these growth initiatives could be transformational for the business in the mid to long term. Post period end, the business posted a positive set of full year results. The focus has been on free cash flow generation and, pleasingly, Gama generated US$14 million in 2017. Operating margins continue to improve across the segments in line with management's long-term targets of 5% in the Air division and 20% in the Ground division.

Ramsdens delivered a strong set of interim results in November 2017 indicating an 18% increase in revenue and 63% increase in profit before tax. In subsequent conversations with management we have been impressed by the continued growth across the business segments. Our investment case is on track with regard to a number of store openings and we note that their flagship Braehead, Glasgow store opened post period end. Elsewhere in the sector, we believe that there may be opportune estate expansion at attractive prices given the challenging high street retail environment.

Since the period end, Sprue Aegis has been challenged by litigation from its US ex-distribution partner which disrupted trading and led to a profit warning. The litigation has been settled and Sprue is hopeful of significant new tender wins in the second quarter of 2018. This trip-up is unfortunate for a company that has a dominant market position, improving margins, and regulatory drivers in its key markets.

Outlook

We follow a strict value investing mandate, seeking to invest in businesses which are trading, or where we can engineer an entry, at a discount to our determination of intrinsic value.

Our determination of risk revolves around permanent erosion of capital, rather than volatility. Therefore, we attempt to avoid investing in anything highly speculative where intrinsic value cannot be determined through forecastable cash flows. We also look favourably upon strong balance sheets, particularly those with net cash positions or where we can find valuation support through net asset value alone, ideally tangible net assets.

With this in mind, we believe that our portfolio is well positioned on valuation grounds to protect and grow our shareholder's capital in the long term. We also believe that by leveraging various strategic initiatives, these businesses should be able to deliver compound growth rates that meet or exceed our 15% p.a return target over the long term.

Given the heightened volatility which has typified the market since the beginning of 2018, we believe that our value strategy will perform well as we opportunistically add to our positions in what we believe are already undervalued shares.

Judith MacKenzie

Partner and Head of Public Equity, Downing LLP

Portfolio information

As at 28 February 2018

Holding in Ordinary Shares unless otherwise stated	Market value (£'000)	% of investments*
Gama Aviation	5,436	16.54
Real Good Food 6.5% loan note (28/06/2020)**	4,906	14.93
AdEPT Telecom	3,518	10.70
Hargreaves Services	3,478	10.59
Ramsdens Holdings	3,086	9.39
Synectics	2,922	8.89
Redhall Group	2,896	8.81
Braemar Shipping Services***	2,370	7.21
Science in Sport	1,457	4.43
Sprue Aegis	1,047	3.19
Real Good Food	902	2.75
Real Good Food 10% loan note (30/09/2019)**	673	2.05
Real Good Food 10% loan note (30/06/2018)**	170	0.52
Total investments	32,861	100.00

All investments are quoted on the AIM Market unless indicated. The total number of holdings as at

28 February 2018 was 10. Details of the equity interest comprising more than 3% of any company's share capital are given in note 17 below.

*Excludes cash

**Unquoted

***Quoted on the Main Market

Background on the investments

AdEPT Telecom PLC (AdEPT)

AdEPT is one of the UK's leading independent providers of managed services for IT, unified communications, and connectivity and voice solutions. It is a business that Judith MacKenzie has known over a decade, so our long-standing relationship has given us a high level of conviction over the ability and integrity of the management team.

Investment case

·     Higher quality earnings: AdEPT has migrated from being a provider of just fixed line solutions to a provider of higher margin managed service solutions across converged telecom and IT activities, introducing higher quality revenue streams to the group at a better margin. The company has an EBITDA margin of approximately 21% and low capital expenditure requirements, which makes the operating structure highly cash generative.

·     M&A: management has made a number of acquisitions since IPO. We have been impressed with management's ability to acquire businesses at attractive prices and how the management of these target businesses are brought into the culture of AdEPT.

·     Engagement: Ian Fishwick, CEO, and John Swaite, FD, are well known to the Downing Public Equity team. Judith first met Ian in 2006 at the IPO of the business, and over this period a strong relationship and level of understanding has been reached. Our relationship with the business is highlighted by our invitation to the Annual Group Sales Conference.

Braemar Shipping Services PLC (Braemar)

Braemar is a leading international provider of broking, financial, consultancy, technical and other services to shipping and marine related industries. We know the business and management team well from Downing client funds' investment spanning over six years.

Investment case

·     Improving margins: we expect global gross domestic product (GDP) growth to be positive year on year, which we believe should drive a steadily increasing demand for shipping and freight volume over the long term. We also expect shipping rates to improve, aided by a shortage of shipping supply (although this can be volatile and we do not attempt to explicitly forecast global supply).

·     Restructuring: operationally, we believe that a restructuring could help to improve Braemar's margins through cost savings. At the time of investment, we expected that the Marine Services restructure would result in a £6 million per annum cost saving from 2018.

·     M&A: we also believe that it could dispose of lower margin businesses and build or acquire higher margin businesses which will be accretive to group margins. This could also be supported by a move to the Alternative Investment Market (AIM) through which the company would enjoy materially lower transaction costs.

Gama Aviation PLC (Gama)

Gama is a global business aviation service provider, headquartered at Farnborough airport. It focuses on air operations (business aircraft management, special missions and charter of business aircraft) and ground operations (engineering, design, software, maintenance, repair and overhaul (MRO), passenger handling and consultancy).

Investment case

·     Organic growth: we expect natural growth to be aided by the increasing cost of compliance which naturally favours players with scale, crowding out the smaller, localised operators that characterise the business aviation market. We also expect margin growth through operational efficiencies and new higher margin activities.

·     Consolidation: Gama is one of the top three global players in the sector. Owing to the crowding out mentioned above, the fragmented market, and Gama's public listing, we believe that the company has the potential to be the consolidator of the market.

·     Re-rating: underlying the operational and market opportunity, we believe that the business is misunderstood and undervalued by the market. Key to a rerating will be Gama's ability to closely control working capital and consistently generate free cash flow. These are aspects which we believe are improving with every successive reporting period.

Hargreaves Services PLC (Hargreaves)

Hargreaves is a conglomerate of infrastructure and commodities businesses which has historically been held in the Downing UK Micro-Cap Growth Fund.

Investment case

·     Value creation: we believe that there is £35 to £50 million of value creation potential over and above the current book value in the next five years - the first plot sale at Blindwells should act as validation. The spin-off of the wind energy assets into Brockwell Energy could also generate a material upwards revaluation as they are developed.

·     Value realisation: the business targets a 40% pay-out ratio but in a capital asset intensive business, returns to shareholders have been reduced through high recurring capital expenditure. In 2017, cash realisations were £25.5 million from legacy assets, but post reinvestment this sum is materially reduced. We expect that the winding down of the legacy capital intensive activities will increase distributable cash.

·     Reducing risk: the winding down of the legacy coal business and associated reduction in inventory reduces the risk to our NAV play and frees up additional cash for developing NAV accretive projects with higher returns, or distribution to shareholders.

Ramsdens Holdings PLC (Ramsdens)

Ramsdens is a growing and diversified financial services provider and retailer, operating in four core business segments of foreign currency exchange, pawnbroking loans, precious metals buying and selling, and retailing of second hand and new jewellery. The group operates from over 120 stores in the UK. We believe that market forecasts are too light and that the business has the potential to grow earnings and dividends around 10-15% per annum.

Investment case

·     Organic growth: the foreign exchange (FX), Retailing and Pawnbroking divisions have grown at annualised rates of 37%, 25% and 7% respectively. We have made prudent assumptions around these verticals but still arrive at numbers materially ahead of the market.

·     Estate growth: management has grown the estate by approximately 12 new stores each year since 2002. Based on management's strategy, and the historic rollout pattern, it would be fair to assume that the company targets a similar level of openings per year over the next 10 years, however the market has assumed far fewer.

·     Operating model: we believe that Ramsdens has an attractive operating model with strong cash generation, a net cash balance sheet, barriers to entry provided by the regulatory environment, and a strong and prudent management team.

Real Good Food PLC (RGD)

RGD groups its operation into two main divisions: Cake Decoration and Premium Bakery; and one smaller segment: Food Ingredients. The Cake Decoration business manufacturers sugar pastes and decorations. Hayden's, the brand under which Premium Bakery operates, is a manufacturer and distributor of premium bakery products, with clients including Waitrose and Marks & Spencer.

Investment case

·     Growth: our investment was to provide a large amount of capital expenditure, which we believe is capable of generating enhanced return on capital and, ultimately, improved earnings in the long term.

·     Governance: the business was in need of appropriate financial controls, accountability and corporate governance which we believe has now largely been implemented.

·     Valuation: we believe that there is a material disconnect between intrinsic value and enterprise value. We expect that the delivery of growth and governance will reduce this valuation spread.

Redhall Group PLC (Redhall)

Redhall is an engineering business offering design, manufacture, installation, maintenance and decommissioning services to a variety of sectors. We were attracted to the business on the basis of increasing UK infrastructure projects and Redhall's strength in its niches.

Investment case

·      Order book: we believe Redhall's expanding order book is undervalued in terms of its growth potential, the visibility provided, and the quality of the underlying projects.

·      Critical infrastructure: The group brings material exposure to high value UK public sector contracts, specifically nuclear projects. These are typically long duration - for example, Hinkley Point which is expected to be constructed over eight to ten years.

·      Improving margin: operational gearing and continuous process improvement are expected to lift margins as the business continues to deliver on new contracts. This follows the completion of the Strategic Turnaround Plan which was executed by outgoing CEO Phil Brierley, and focused on exiting capital intensive, low margin contracting activities

Science in Sport PLC (SiS)

SiS is a leading sports nutrition company that develops, manufactures and markets sports nutrition products for professional athletes and sports enthusiasts. Downing managed funds initially invested in the company in 2013 and were impressed by the strength of the brand and the management team.

Investment case

·     Gross margin: the business has sector-leading gross margins and we believe that this will continue. We believe revenue growth will further improve utilisation of the current facility and the company's growing e-commerce business will provide additional margin support.

·     Growth: in November 2017, SiS returned to the market for working capital and growth investment for further expansion in the US and Italy, and into a new target market - football. The Company participated in this placing.

·     Return on capital: valuation approach in this case is centred around incremental return on invested capital on our monies. It assumes an exit at a multiple at least as great as the sector average, which we believe to be around 2.5x enterprise value (EV)/sales. On this basis, we believe that the company can deliver more than a 15% internal rate of return (IRR) over our investment horizon.

Sprue Aegis PLC (Sprue)

Sprue is a major designer and distributor of smoke and carbon monoxide detectors and other safety-related devices, in Europe. Those incorporating Sprue's own technology/IP are sold under several brands including FireAngel, the UK's number one retail brand of detectors.

Investment case

·     Legislative drivers: the company benefits from country legislation which is driving the adoption of fire protection products. Guidance is for the purchase of smoke alarms with a 10-year lifespan and we are already beginning to see a replacement cycle in mature markets where there is high penetration.

·     Improving margins: gross margins on Sprue's products differ to those of typical white goods - earning around 30%, and over 45% on IP-enabled products. When combined with an improved operational structure, conversion to profits and cash flow are expected to improve. The move to Flex in Poland for manufacturing and supply of smoke detectors is progressing to plan and we believe this will enable closer control of production costs. Finally, the termination of a distribution agreement with BRK Brands will save £2.9 million in annual distribution fees.

·     Market growth: Sprue has robust technology and IP around device interactivity, owing to its long tenure in the sector. While there are new upstarts in the Internet of Things (IoT) sector, who are investing heavily to gain market share, we believe that Sprue's technology is superior. Exploitation of the IoT market potential could offer material upside.

Synectics PLC (Synectics)

Synectics is a leader in the design, integration, control and management of advanced surveillance technology and networked security systems. It operates mainly in heavily regulated industries, including gaming, transport and critical infrastructure, high security and public space applications and oil and gas.

Investment case

-    Order book: our investment case is predicated on the strong order book. We see great potential in the gaming market where Synectics has an existing client base of global casino owners and operators.

-    Improving quality earnings: having recently restructured we believe that the business is more operationally geared and could double its return on capital employed in the mid-term. We also value Synectics' focus on managed services which contribute approximately 25% of higher quality recurring revenues.

-    Strategic opportunity: we see the opportunity on two levels - the first is an improvement in operating performance and the second is consolidation potential in what is a fragmented sector with exposure to highly regulated markets.

Our expectations of the investee companies

When we invest in companies we expect, in return, rigorous and effective corporate governance; directors who understand their duties and who are familiar with The General Duties section of the Companies Act 2006 and The UK Corporate Governance Code from the Financial Reporting Council in 2016.

·     Directors' responsibilities: in our view directors' responsibilities are demanding. They stand accountable for the culture, foresight and success of the company, to which they should apply the best of their knowledge and ability to enquire and act in the interests of the company as a whole for its current and future shareholders. A company's success depends on investment in its long-term, sustainable advantage as well as its financial strength and profitability. A company's return on investment underpins its shareholders' returns.

·     Constructive challenge: we look for alert, questioning, competent boards that constructively challenge management, help develop strategy and long-term objectives, monitor performance, ensure the build-up of necessary assets, skills and capable management and lead in setting a culture of integrity. We will take action if we do not find that level of competence.

In particular we would expect to find:

·     Leadership: every investee company should be headed by an independent Chairman leading an effective, questioning, challenging board that sees itself as collectively responsible for the long-term success of the company. We will encourage that if it is missing. We will say so publicly if we do not think the Chairman is up to the job.

·     Effectiveness: the board and its committees should be engaged with the business and have the skills, experience, independence and knowledge to enable them to challenge constructively, and fully undertake their duties. It should be clear to investors why each director is on the board, what skills and contribution that director is there to provide and all directors and senior management should regularly update and refresh their skills and knowledge. There should be a rigorous process for the appointment of new directors.

·     The Chairman: should lead the board, create the conditions for overall board and individual director effectiveness, ensure that the board gets information in a form and of a quality sufficient to discharge its duties and should undertake a formal annual evaluation of the board and each director's performance.

·     Accountability: We expect all directors to appreciate that accountability for culture, integrity, the 'tone from the top', the creation of value, of corporate and shareholder value, and the company's success lies with them.

Key Performance Indicators (KPIs)

A number of performance indicators are used to monitor and assess the Company's success in achieving its objectives and to measure its progress and performance.

The principal KPIs are described below:

·      Performance against the Company's peers - while the principal objective is to achieve capital growth, the Board also monitors the performance relative to a broad range of competitor funds. The Company does not have a benchmark.

·      Share price discount to NAV per share - the Board monitors the level of the Company's premium or discount to NAV closely. During the period 9 May 2017 to 28 February 2018, the shares traded between a premium of 10.96% and discount of 2.01% at an average premium of 4.01%.

·      Share price movements - the Company's Ordinary Share price decreased by 6.4% over the period under review.

·      Ongoing charges - the ongoing charges represent the Company's management fee and all other operating expenses excluding any finance costs, expressed as a percentage of the average daily net assets during the year. The ongoing charges for the period ended 28 February 2018 were 1.48%.

Principal Risks

The Company is exposed to a variety of risks and uncertainties. The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its investment objective, business model, future performance, solvency or liquidity.

The Company maintains a risk matrix which sets out the risks facing the Company, the likelihood and potential impact of each risk and the controls established for mitigation. The risk matrix is reviewed by the Audit Committee on a regular basis.

The principal risks identified and the actions taken to mitigate those risks are set out below.

Risk		Mitigation
Investment performance
The investment objective of the Company may not be achieved as returns are reliant primarily upon the performance of the portfolio.		The Company is reliant on the Investment Manager's investment process. The Board has set investment restrictions and guidelines which the Investment Manager monitors and regularly reports on. The Board monitors the implementation and results of the investment process with the Investment Manager. The Investment Manager attends all Board meetings and provides the Board with information including performance data, an explanation of stock selection decisions, portfolio exposure and the rationale for the portfolio composition.
The Company will invest primarily in the smallest UK quoted or traded companies, by market capitalisation. Smaller companies can be expected, in comparison to larger companies, to have less mature businesses, a more restricted depth of management and a higher risk profile.		The Investment Manager has significant experience in small cap investing and deploys an approach that is designed to maximise the potential for the investment objective to be achieved over the longer-term.
Operational
The Company relies on external service providers. In the event that they are unable, or unwilling to perform in accordance with its terms of appointment the Company may impact the Company's performance. Disruption to the accounting, payment systems or custody records could prevent the accurate reporting and monitoring of the Company's financial position.	Due diligence is undertaken before contracts are executed with potential service providers. The Board monitors the performance of service providers together with the associated costs. The Board also reviews reports on the effective operation of the internal controls of service providers.
The security of the Company's assets, dealing procedures, accounting records and adherence to regulatory and legal requirements depend on the effective operation of the control systems of the service providers.	The Company's assets are subject to a strict liability regime and in the event of a loss of financial assets held in custody assets of an identical type or the corresponding amount must be returned unless the loss was beyond the reasonable control of the custodian.
	The Board also considers the business continuity arrangements of the Company's key service providers. The Board may terminate all key contracts on normal market terms.
Financial
The Company's investment activities expose it to a variety of financial risks that include interest the financial statements together with a summary of the rate, currency and liquidity risk.	Further details of these risks are disclosed in Note 14 to policies for managing these risks.
Legal and compliance
The Company has been accepted by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant conditions.	The Investment Manager monitors investment movements and the amount of proposed dividends, if any, to ensure that the relevant provisions of the Corporation Tax Act 2010 are not breached. A report is provided to the Board at each meeting.
The Company is subject to the Companies Act 2006, the Alternative Investment Fund Manager's Directive, the UK Listing Rules and Disclosure & Transparency Rules and the Market Abuse Regulations	The Company Secretary and the Company's professional advisers provide reports to the Board in respect of compliance with all applicable rules and regulations and will ensure that the Board is made aware of any changes to these rules and regulations. Compliance with the accounting rules affecting investment trusts is also monitored.

Company accounts

Statement of comprehensive income

For the period 17 February 2017 (date of incorporation) to 28 February 2018

	Revenue (£'000)	Capital (£'000)	Total (£'000)
Losses on investments at fair value through profit or loss (note 9)	-	(2,447)	(2,447)
Investment income (note 3)	417	-	417
	417	(2,447)	(2,030)
Investment management fee (note 4)	(90)	(358)	(448)
Other expenses (note 5)	(339)	(1)	(340)
	(429)	(359)	(788)
Loss before taxation	(12)	(2,806)	(2,818)
Taxation (note 7)	-	-	-
Loss for the period	(12)	(2,806)	(2,818)
	Revenue (p)	Capital (p)	Total (p)
Loss per Ordinary Share (note 6)	(0.03)	(6.22)	(6.25)

The total column of this statement represents the statement of comprehensive income of the Company prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union.

The supplementary revenue and capital return columns are prepared under guidance published by the Association of Investment Companies (AIC).

The loss for the period disclosed above represents the Company's total comprehensive income. The Company does not have any other comprehensive income.

All items in the above statement are those of a single entity and derive from continuing operations. No operations were acquired or discontinued during the period.

There are no comparative figures for the prior year as the Company was incorporated on 17 February 2017. These are therefore the first financial statements produced by the Company.

The notes below form an integral part of these financial statements.

Statement of changes in equity

For the period ended 28 February 2018

	Share Capital £'000	Share premium account £'000	Special reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
At 17 February 2017	-	-	-	-	-	-
Loss for the period	-	-	-	(2,806)	(12)	(2,818)
Issue of Management Shares	50	-	-	-	-	50
Redemption of Management Shares	(50)	-	-	-	-	(50)
Issue of Ordinary Shares	56	55,544	-	-	-	55,600
Expenses of share issue	-	(1,038)	-	-	-	(1,038)
Cancellation of share premium account	-	(54,506)	54,506	-	-	-
Dividends paid (note 8)	-	-	-	-	-	-
At 28 February 2018	56	-	54,506	(2,806)	(12)	51,744

There are no comparative figures for the prior year as the Company was incorporated on 17 February

2017. These are therefore the first financial statements produced by the Company.

The notes below form an integral part of these financial statements.

Statement of financial position

As at 28 February 2018

	2018 £'000
Non-current assets
Investments held at fair value through profit or loss (note 9)	32,861
	32,861
Current assets
Trade and other receivables (note 10)	114
Cash and cash equivalents	20,704
	20,818
Total assets	53,679
Current liabilities
Trade and other payables (note 11)	(1,935)
	(1,935)
Total assets less current liabilities	51,744
Net assets	51,744
Represented by:
Share capital (note 13)	56
Special reserve	54,506
Capital reserve	(2,806)
Revenue reserves	(12)
Equity shareholders' funds	51,744
Net asset value per Ordinary Share (note 13)	93.06p

There are no comparative figures for the prior year as the Company was incorporated on 17 February 2017. These are therefore the first financial statements produced by the Company.

The financial statements were approved by the Board on 21 May and were signed on its behalf by:

Hugh Aldous, Chairman

Downing Strategic Micro-Cap Investment Trust PLC

Registered in England and Wales, no. 10626295.

The notes below form an integral part of these financial statements.

Statement of cash flow

For the period 17 February 2017 (date of incorporation) to 28 February 2018

	(£'000)
Operating activities
Loss before tax	(2,818)
Losses on investments at fair value through profit or loss	2,447
Increase in other receivables	(114)
Increase in other payables	119
Purchases of investments	(33,492)
Sales of investments	-
Net cash outflow from operating activities	(33,858)
Financing activities
Issues of Ordinary Shares	55,600
Expenses of Ordinary Share issue	(1,038)
Issue of Management Shares	50
Cancellation of Management Shares	(50)
Dividends paid	-
Net cash inflow from financing activities	54,562
Change in cash and cash equivalents	20,704
Cash and cash equivalents at start of period	-
Cash and cash equivalents at end of period	20,704
Comprises
Cash and cash equivalents	20,704

There are no comparative figures for the prior year as the Company was incorporated on 17 February 2017. These are therefore the first financial statements produced by the Company.

The notes below form an integral part of these financial statements.

Notes to the financial statements

1.     General information

Downing Strategic Micro-Cap Investment Trust PLC (the Company) was incorporated in England and Wales on 17 February 2017 with registered number 10626295, as a closed-end investment company.

The Company commenced its operations on 9 May 2017. The Company intends to carry on business as an investment trust within the meaning of Chapter 4 of Part 24 of the Corporation Tax Act 2010.

The Company's shares were admitted to the Official List of the UK Listing Authority with a premium listing on the 9 May 2017. On the same day, trading of the Ordinary Shares commenced on the London Stock Exchange.

2.     Accounting policies

The principal accounting policies followed by the company are set out below:

Basis of accounting

The annual financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. These comprise standards and interpretations approved by the International Accounting Standards Board (IASB), together with interpretations of the International Accounting Standards' and Standing Interpretations Committee (IASC) that remain in effect, and to the extent that they have been adopted by the European Union.

These financial statements are presented in Sterling (£) rounded to the nearest thousand. Where presentational guidance set out in the statement of recommended practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (SORP), issued by the Association of Investment Companies (as updated in January 2017), is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a consistent basis compliant with the recommendations of the SORP.

There are no comparative figures for the prior year as the Company was incorporated on 17 February 2017. These are therefore the first financial statements produced by the Company.

Going concern

The financial statements have been prepared on a going concern basis and on the basis that approval as an investment trust company will continue to be met.

The Directors have made an assessment of the Company's ability to continue as a going concern and are satisfied that the Company has the resources to continue in business for the foreseeable future, being a period of 12 months from the date these financial statements were approved. Furthermore, the Directors' are not aware of any material uncertainties that may cast significant doubt upon the Company's ability to continue as a going concern, having taken into account the liquidity of the Company's investment portfolio and the Company's financial position in respect of its cash flows and investment commitments. Therefore, the financial statements have been prepared on the going concern basis.

Presentation of statement of comprehensive income

In order to better reflect the activities of an investment trust and in accordance with guidance issued by the AIC, supplementary information which analyses the income statement between items of revenue and capital nature has been presented alongside the income statement. The net revenue is the measure the Directors believe is appropriate in assessing the Company's compliance with certain requirements set out in the Investment Trust (Approved Company) (Tax) Regulations 2011.

Accounting developments

The following amendments to standards effective this year, being relevant and applicable to the Company, have been adopted, although they have no impact on the financial statements:

-    Amendments to IAS 7 - Disclosure initiative - statement of cash flows

-    Amendments to IAS 12 - Recognition of deferred tax assets for unrealised losses

The following accounting standards and their amendments were in issue at the period end but will not be in effect until after this financial year end. The Directors are considering the impact these accounting standards will have on the financial statements.

International Financial Reporting Standards

-    IFRS 7 Financial Instruments: disclosures for initial application of IFRS 9 - effective 1 January 2016 or when IFRS 9 is first applied

-    IFRS 9 Financial Instruments - effective 1 January 2018

-    IFRS 15 Revenue from Contracts with Customers - effective 1 January 2018

-    IFRS 16 Leases - effective 1 January 2019

The revised IFRS 9 Financial Instruments replaces IAS 39 and applies to the classification and measurement and impairment of financial assets and liabilities, and hedge accounting. The adoption of IFRS 9 will have an effect on the classification but not the measurement of the Company's financial assets, but will potentially have no impact on the classification and measurement of financial liabilities. It will also introduce a new expected loss impairment model requiring more timely recognition of expected credit losses and a reformed model for hedge accounting with enhanced disclosure of risk management activity. The Standard is effective for annual period beginning on or after 1 January 2018.

Critical accounting judgements and uses of estimation

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the amounts reported in the balance sheet and the income statement. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. There were no significant accounting estimates or significant judgements in the current period, except the loan notes of Real Good Food as explained in note 14.

Investments held at fair value

All investments held by the Company are designated at 'fair value through profit or loss'. Investments are initially recognised at cost, being the fair value of the consideration given. After initial recognition, investments are measured at fair value, with unrealised gains and losses on investments recognised in the statement of comprehensive income and allocated to capital. Realised gains and losses on investments sold are calculated as the difference between sales proceeds and cost.

For investments actively traded in organised financial markets, fair value is generally determined by reference to quoted market bid prices at the close of business on the balance sheet date, without adjustment for transaction costs necessary to realise the asset.

When a purchase or sale is made under a contract, the terms of which require delivery within the time frame of the relevant market, the investments concerned are recognised or derecognised on the trade date.

Unquoted investments are valued by the Directors at the balance sheet date based on recognised valuation methodologies, in accordance with International Private Equity and Venture Capital (IPEVC) Valuation Guidelines such as dealing prices or third-party valuations where available, net asset values and other information as appropriate.

All investments for which fair value is measured or disclosed in the financial statements will be categorised within the fair value hierarchy in the notes of the financial statements, described as follows, based on the lowest significant applicable input:

-    Level 1 reflects financial instruments quoted in an active market.

-    Level 2 reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets.

-    Level 3 reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data. For investments that are recognised in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing the categorisation (based on the lowest significant applicable input) at the date of the event that caused the transfer.

Income

Dividends receivable on quoted equity shares are taken into account on the ex-dividend date. Where no ex-dividend date is quoted, they are brought into account when the Company's right to receive payment is established.

Special dividends will be taken to revenue or capital account depending on their nature. In deciding whether a dividend should be regarded as a capital or revenue receipt, the Company will review all relevant information as to the reasons for the sources of the dividend on a case by case basis.

When the Company elects to receive scrip dividends in the form of additional shares rather than in cash, the amount of the cash dividend forgone is recognised as income. Any excess in the value of the cash dividend will be recognised in the capital column.

Interest on debt securities is recognised on an effective interest rate basis.

Other investment income and interest receivable are included in the financial statements on an effective interest basis.

Expenses

All expenses are accounted for on an accruals basis. All expenses are charged through the revenue account in the statement of comprehensive income except as follows:

-    expenses which are incidental to the acquisition of an investment are included within the costs of the investment; and

-    expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.

All other expenses are allocated to revenue with the exception of 80% of the Investment Manager's fee which is allocated to capital. This is in line with the Board's expected long-term split of returns from the investment portfolio in the form of income and capital gains respectively.

Taxation

The charge for taxation is based on net revenue for the year. Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date. Investment Trusts which have approval under section 1158 of the Corporation Tax Act 2010 are not liable for taxation on capital gains. Any tax relief obtained in respect of investment management fees and other capital expenses charged or allocated to the capital column of the statement of comprehensive income is reflected in the capital reserve and a corresponding amount is charged against the revenue column of the statement of comprehensive income. The tax relief is the amount by which corporation tax payable is reduced as a result of these capital expenses.

Cash and cash equivalents

Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value.

Share issue costs

Share issue costs relating to Ordinary Share issues by the Company are charged to the share premium account.

Segmental reporting

The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business. The Company only invests in companies quoted in the UK.

Capital reserve

Capital reserve includes:

-    gains and losses on the disposal of investments; f exchange difference of a capital nature;

-    expenses, together with the related taxation effect, allocated to this reserve in accordance with the above policies; and

-    increase and decrease in the valuation of investments held at period end.

This reserve is distributable.

Revenue reserve

This reserve includes net revenue recognised in the revenue column of the statement of comprehensive income. This reserve is distributable.

Special reserve

The Company cancelled its share premium account following a court order issued on 12 July 2017. As a result, a distributable special reserve was created. This reserve is distributable.

Dividends payable to shareholders

Dividends to shareholders are recognised as a liability in the period in which they are paid or approved in general meetings and are taken to the statement of changes in equity. Dividends declared and approved by the Company after the balance sheet date have not been recognised as a liability of the Company at the balance sheet date.

3. Income

For the period 17 February 2017 to 28 February 2018

	£'000
Income from investments
UK dividend income	173
UK fixed interest income	244
Total	417

4. Investment management fee

In respect of its services provided under the Management Agreement, the Investment Manager is entitled to receive a management fee payable monthly in arrears calculated at the rate of one twelfth of 1% of the market capitalisation as at the relevant calculation date.

The Investment Manager has agreed that, for so long as it remains the Company's Investment Manager, it will rebate such part of any management fee payable to it so as to help the Company maintain an ongoing charges ratio of 2% or lower.

At 28 February 2018, an amount of £43,368 was outstanding and due to Downing LLP in respect of Management fees.

For the period 17 February 2017 to 28 February 2018

	Revenue £'000	Capital £'000	Total £'000
Investment management fee	90	358	448

5. Other expenses

For the period 17 February 2017 to 28 February 2018

	£'000
Administration and secretarial fees	66
Audit services - Auditor's remuneration1,2	30
Directors' fees	96
Safe custody fees	22
Legal fees	30
Sundry fees	90
Taxation services	5
Revenue expenses	339
Capital expenses	1
Total expenses	340

¹During the period, the Company paid £17,500 to the Auditors for non-audit services which included
the provisions of comfort letters and consents in relation to the document produced for the IPO. The amount paid has been included in expenses of share issue taken to special reserves shown under note 14. The ratio of the fee for non-audit services compared to the audit fee was 70%.

²Inclusive of VAT at 20%.

6.   Loss per Ordinary Share

	Net return £'000	Per share pence
Revenue return	(12)	(0.03)
Capital return	(2,806)	(6.22)
Total return	(2,818)	(6.25)
Weighted average number of Ordinary Shares		45,089,319

No shares have been issued since launch.

7.   Taxation

For the period 17 February 2017 to 28 February 2018

	Revenue £'000	Capital £'000	Total £'000
UK corporation tax at 19.22%	-	-	-

The current taxation charge for the period differs from the standard rate of corporation tax in the UK of 19.22%. The differences are explained below:

	Revenue £'000	Capital £'000	Total £'000
Loss before taxation	(12)	(2,806)	(2,818)
Theoretical tax at UK corporation tax rate of 19.22%	(2)	(539)	(541)
Effects of: UK dividends not taxable	(33)	-	(33)
Capital items not taxable	-	470	470
Excess expenses in the period	35	69	104
Actual current tax charge	-	-	-

Factors that may affect future tax charges:

The Company has unrealised expenses of £543,000. It is unlikely that the Company will generate sufficient taxable profits in the future to utilise these expenses, therefore no provision for any deferred tax asset has been made in the current year. The Company has not provided for deferred tax on capital gains or losses arising on the revaluation or disposal of investments as it is exempt from tax on these items because of its status as an investment trust.

8.      Dividends

The Board has decided that no final dividend will be paid.

9.          Investments

For the period 17 February 2017 to 28 February 2018

	£'000
Opening book cost	-
Opening investment holding gains	-
Opening valuation	-
Movements in the period
Purchases at cost	35,308
Disposals:
Proceeds	-
Net realised losses on disposals	-
Movement in investment holding losses	(2,447)
Closing valuation	32,861
Closing book cost	35,308
Closing investment holding losses	(2,447)
	32,861
Realised gains on disposals	-
Movement in investment holding losses	(2,447)
	(2,447)

Transaction costs

During the period the Company incurred transaction costs of £44,330 and nil on purchases and sales respectively. These amounts are included in losses on investments, as disclosed in the statement of comprehensive income.

10. Trade and other receivables

At 28 February 2018

	£'000
Dividends receivable	109
Prepayment and other debtors	5
	114

11. Trade and other payables

At 28 February 2018

	£'000
Amount due to brokers	1,816
Other creditors	119
	1,935

12. Called-up share capital

At 28 February 2018

	£'000
At beginning of period	-
Issue of ordinary shares	56
At end of period	56

The Company was incorporated on 17 February 2017 with an issued share capital of £50,002 represented by 50,000 Management shares of £1.00 each and 2 Ordinary shares of £0.001. These Management shares were redeemed immediately following admission of the Ordinary shares on the 9 May 2017 out of the proceeds of this issue.

On 9 May 2017, the Company issued 55,600,000 Ordinary £0.001 shares at £1 per share in a placing, offer for subscription and intermediaries offer, raising £54.5 million after expenses.

As at 28 February 2018 there were 55,600,002 Ordinary shares in issue.

13. Net asset value per Ordinary Share

At 28 February 2018

	NAV per share pence	NAV attributable £'000
Ordinary Shares: Basic and diluted	93.06	51,744

NAV per Ordinary Share is based on net assets at the period end and 55,600,002 Ordinary Shares, being the number of Ordinary Shares in issue at the period end.

14. Analysis of financial assets and liabilities

Investment Objective and Policy

The Company's Investment Objective and Investment Policy are detailed above. The Company's investing activities in pursuit of its Investment Objective involve certain inherent risks. The Company's financial instruments can comprise:

-    shares and debt securities held in accordance with the Company's Investment Objective and investment policies;

-    derivative instruments for efficient portfolio management, gearing and investment purposes; and

-    cash, liquid resources and short-term receivables and payables that arise from its operations.

The risks identified arising from the Company's financial instruments are market risk (which comprises market price risk, interest rate risk and foreign currency exposure risk), liquidity risk and credit and counterparty risk. The Company may enter into derivative contracts to manage risk. The Board reviews and agrees policies for managing each of these risks, which are summarised below.

Market risk

Market risk arises from uncertainty about future prices of financial instruments used in the Company's business. It represents the potential loss the Company might suffer through holding market positions by way of price movements, interest rate movements and exchange rate movements. The Investment Manager assesses the exposure to market risk when making each investment decision and these risks are monitored by the Investment Manager on a regular basis and the Board at quarterly meetings with the Investment Manager.

Market price risk

Market price risk (i.e changes in market prices other than those arising from currency risk or interest rate risk) may affect the value of investments.

The Board manages the risks inherent to the investment portfolio by ensuring full and timely reporting of relevant information from the Investment Manager.

Investment performance and exposure are reviewed at each Board meeting.

The Company's exposure to changes in market prices as at 28 February 2018 on its equity investments held at fair value through profit or loss was £32,861,000.

A 10% increase in the fair value of its investments at 28 February 2018 would have increased net assets attributable to shareholders by £3,286,000. An equal change in the opposite direction would have decreased the net assets and net profit available to shareholders by an equal and opposite amount. The analysis is based on closing balances only and is not representative of the period as a whole.

Fair value of loan notes of Real Good Food was calculated by discounting the expected future cash flows using the original effective interest being 6.5% and 10%. If these rates were increased by 2%, the fair value would have reduced by £206,502. As a result, net assets attributable to shareholders would decline by the same amount. An equal change in opposite direction would have increased the net assets attributable to shareholders by an equal and opposite amount.

Interest rate risk

Interest rate movements may affect the level of income receivable on cash deposits. The Company does not currently receive interest on its cash deposits.

The Company's financial assets may include investment in fixed interest securities, such as UK Corporate debt stock, whose fair value may be affected by movements in interest rates. The majority of the Company's financial assets and liabilities, however, are non-interest bearing. As a result, the Company's financial assets and liabilities are not subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates. There was no exposure to interest bearing liabilities during the period ended 28 February 2018

The possible effects on the fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions. The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions.

The interest rate profile of the Company was as follows:

At 28 February 2018

	£'000
Cash and cash equivalents	20,704
Real Good Food loan notes	5,749

The exposure, at 28 February 2018, of financial assets and liabilities to interest rate risk is shown by reference to:

-    floating interest rates - when the rate is due to re-set; and

-    fixed interest rates - when the financial instrument is due for repayment.

	2018 in one year £'000	2018 greater than or less £'000	2018 total one year £'000
Exposure to fixed interest rates:
Unquoted loan notes	170	5,579	5,749
Cash and cash equivalents	20,704	-	20,704
Total	20,874	5,579	26,453

Foreign currency risk

All the Company's assets are denominated in Sterling and accordingly the only currency exposure the Company has is through the trading activities of its investee companies.

Liquidity risk

Liquidity risk is not significant as the Company is a closed-end investment trust and the majority of the Company's assets are investments in quoted equities and other quoted securities that are readily realisable.

Credit and counterparty risk

Credit risk is the risk of financial loss to the Company if the contractual party to a financial instrument fails to meet its contractual obligations.

Credit risk arises from two main sources. Firstly, the possibility that the issuer of a security will be unable to pay interest and principal in a timely manner. Secondly, there is the possibility of default of the issuer. Adhering to investment guidelines and avoiding excessive exposure to one particular issuer or scheme can limit credit risk.

The maximum exposure to credit risk as at 28 February 2018 was £26,562,000. The calculation is based on the Company's credit risk exposure as at 28 February 2018 and this may not be representative for the whole period.

The maximum exposure to credit at 28 February comprises:

	2018 £'000
Dividends	109
Cash and cash equivalents	20,704
Unquoted loan notes	5,749
Total	26,562

The Company's quoted investments are held on its behalf by The Northern Trust Company, acting as the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Board monitors the Company's risk by reviewing the custodian's internal controls report.

Investment transactions are carried out with a number of brokers whose creditworthiness is reviewed by the Investment Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed.

Cash is only held at banks that have been identified by the Board as reputable and of high credit quality.

None of the Company's assets are past due or impaired.

15. Fair value hierarchy

Financial assets and financial liabilities of the Company are carried in the statement of financial position at their fair value. The fair value is the amount at which the asset could be sold or the liability transferred in a current transaction between market participants, other than a forced or liquidation sale. For investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices and Stock Exchange Electronic Trading Services (SETS) at last trade price at the balance sheet date, without adjustment for transaction costs necessary to realise the asset.

The Company measures fair values using the following hierarchy that reflects the significance of the inputs used in making the measurements. Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant assets as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume on an ongoing basis such that quoted prices reflect prices at which an orderly transaction would take place between market participants at the measurement date. Quoted prices provided by external pricing services, brokers and vendors are included in Level 1, if they reflect actual and regularly occurring market transactions on an arm's length basis.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).

Level 2 inputs include the following:

-    quoted prices for similar (i.e. not identical) assets in active markets;

-    quoted prices for identical or similar assets or liabilities in markets that are not active. Characteristics of an inactive market include a significant decline in the volume and level of trading activity, the available prices vary significantly over time or among market participants or the prices are not current;

-    inputs other than quoted prices that are observable for the asset (for example, interest rates and yield curves observable at commonly quoted intervals); and

-    inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (market-corroborated inputs).

Level 3 - Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability.

At 28 February 2018

	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Quoted on Main	2,370	-	-	2,370
Market
Quoted on AIM	24,742	-	-	24,742
Unquoted loan notes	-	-	5,749	5,749
	27,112	-	5,749	32,861

There were no transfers between level 1 and levels 2 during the period. A recognition of fair value measurements in level 3 is set out in the following table.

At 28 February 2018

	£'000
Opening balance	-
Purchases	5,749
Sales	-
Total gains or losses included in losses on investments in the statement of comprehensive income
on assets sold	-
on assets held at period end	-
Closing balance	5,749

16. Capital management

The Company's capital is as disclosed in the statement of financial position and is managed on a basis consistent with its investment objective and policies, as discussed in the strategic report above. The principal risks and their management are disclosed in the strategic report.

17. Significant interests

As at 28 February 2018 the Company held interests amounting to 3% or more of the equity the following investee companies.

	Valuation £'000	Cost £'000	%
Redhall	2,896	4,126	12.43
Synectics	2,922	3,414	9.12
RGD	902	1,857	6.76
Ramsdens	3,086	1,857	5.13
AdEPT	3,518	3,629	4.79
Gama	5,303	4,928	4.70
Hargreaves	3,478	3,653	3.27
SiS	1,457	1,500	3.21
Braemar	2,370	2,735	3.20

18. Related parties and Investment Manager

Investment Manager

Downing LLP have been appointed as the Investment Manager to the Company. The relationship is governed by an agreement dated 23 March 2017.

The total investment management fee charged by Downing LLP for the period ended 28 February 2018 was £447,993. The amount outstanding at 28 February 2018 was £43,368.

Directors

Disclosure of the Directors' interests in the Ordinary Shares of the Company and fees and expenses payable to the Directors are set out in the Directors' Remuneration Report. At 28 February 2018, there were no outstanding Directors' fees.

19. Contingent liabilities

There were no contingent liabilities at 28 February 2018.

Shareholder information

Annual General Meeting

The Annual General Meeting of Company will be held at Andaz Hotel, 40 Liverpool Street, London EC2M 7QN on 27 June 2018 at 2.30 pm.

Financial calendar

Company year end: 28 February

Annual results announced: May

Annual general meeting: 27 June 2018

Company half-year end: 31 August

Half-yearly results announced: November

 

END

 

 

FR SEWESDFASEEI