Annual Financial Report

RNS Number : 2647P

Herald Investment Trust PLC

17 February 2016

ANNUAL FINANCIAL REPORT for the year ended

31 December 2015 (audited)

This is the Annual Financial Report of Herald Investment Trust plc as required to be published under DTR 4 of the UKLA Listing Rules.

Results and dividend

The net asset value (NAV) of the Company at 31 December 2015 was 881.8p per ordinary share (2014 - 813.2p). This represented an increase of 8.4% during the year. The discount narrowed to 15.5% from 19.0% and the share price increased by 13.1% to 745.3p.

The Company made a revenue loss of £36,000 (2014: loss of £1,464,000) giving net earnings of (0.05p) (2014: (1.89p)) per share. The directors do not recommend a dividend (2014 - nil) for the year ended 31 December 2015.

The financial information set out in this Annual Financial Report does not constitute the Company's statutory accounts for 2014 or 2015. Statutory accounts for the years ended 31 December 2014 and 31 December 2015 have been reported on by the Independent Auditor. The Independent Auditor's Reports on the Annual Report and Financial Statements for 2014 and 2015 were unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006. Statutory accounts for the year ended 31 December 2014 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2015 will be delivered to the Registrar in due course.

The financial information in this Annual Financial Report has been prepared using 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' (FRS102), which forms part of revised Generally Accepted Accounting Practice ('New UK GAAP') issued by the Financial Reporting Council in 2013, 2014 and 2015. The financial statements have also been prepared in accordance with The Companies Act 2006 and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued by the Association of Investment Companies (AIC) in November 2014.

As a result of the first time adoption of 'New UK GAAP' and the revised SORP, comparative amounts and presentation formats have been amended where required. There were no adjustments to the Company's income statement for the financial year ended 31 December 2015 and the total equity as at 1 January 2015 and 31 December 2015 between UK GAAP as previously reported and FRS 102 as a result of changes to accounting policies. There were no adjustments to the Company's balance sheet at 1 January 2015 or 31 December 2015 on transition to FRS 102. The Company's cash flow statement reflects the presentation requirements of FRS 102, which are different to those prepared under FRS 1. In addition, the cash flow statement reconciles to cash and cash equivalents whereas under previous UK GAAP, the cash flow statement reconciled to cash. The principal accounting policies adopted are unchanged from those used in the preparation of the statutory accounts for the year ended 31 December 2014.

STATISTICS AND PERFORMANCE

	2015	31 December 2014	% change
Total assets (before deduction of bank loans and derivative financial instruments)	£709.1m	£667.4m
Bank loans	£25.0m	£25.0m
Derivative financial instruments	£13.0m	£13.5m
Shareholders' funds	£671.1m	£628.9m
Net asset value per ordinary share	881.8p	813.2p	8.4
Share price	745.3p	659.0p	13.1
Numis Smaller Companies Index plus AIM (ex. investment companies)	4,628.6	4,390.7	5.4
Russell 2000 (small cap) Technology Index (in sterling terms)	1,540.2	1,450.3	6.2
Composite comparative index			5.9
Dividend per ordinary share	-	-
Revenue earnings per ordinary share	(0.05p)	(1.89p)
Ongoing charges*	1.08%	1.07%
Discount to NAV	15.5%	19.0%

* Ongoing charges calculated in accordance with AIC guidelines: annualised charges, excluding interest, incurred by the Company, expressed as a percentage of the average net asset value.

Long Term Performance Summary

The following table indicates how an investment in Herald has performed relative to its comparative index (applied retrospectively) and its underlying fully diluted net asset value over the period since inception of the Company.

	31 December 2015	Inception 16 February 1994	% change
Net asset value per ordinary share (including current year income)	881.8p	98.7p	793.4
Net asset value per ordinary share (excluding current year income)	881.8p	98.7p	793.4
Share price	745.3p	90.9p	719.9
Numis Smaller Companies Index plus AIM (Capital Gains ex. investment companies)	4,628.6	1,750.0	164.5
Russell 2000 (small cap) Technology Index (in sterling terms)	1,540.2	688.7	123.6

Chairman's Statement AND REVIEW OF 2015

I am pleased to report a rise in net assets of 8.4% to 881.8p, which is within 1.9% of the all-time high reached in November. In the wider world, 2015 was a year of extremes with a collapse in commodity prices and emerging market currencies, and a bubble of excitement in the privately funded technology sector on the West Coast, and in the biotechnology sector. For Herald Investment Trust plc progress has been reassuringly steady. Yet again takeovers have been important, and completed takeovers in 2015 totalled £94m. These transactions delivered half the return of the whole portfolio in the year.

The return on the UK element of the portfolio, which accounts for 64% of the Company's net assets at the year-end, was 10.4% versus the Numis Smaller Companies Index (extended to include AIM, excluding investment companies) total return of 8.6%. The North American return was 8.7% versus a sterling return of 6.6% for the Russell 2000 Technology Index, and North America accounted for 22.5% of the Company's net assets at the year end. Europe, the Middle East and Africa returned 11.8%, while Asia returned 1.4%. The global uncertainties led us to run net cash positions for most of the year, although we had the interest cost of £25m debt and a further £25m undrawn. We believe it is an inherent benefit of a closed end structure to have the ability to borrow, and believe that it is important to have access to these funds in any correction.

Growth in net dividend income was a reassuring 14.9%, but the lack of interest on bonds and cash balances is reflected in the income statement. The reduction in debt enabled a near break-even position, which was an improvement on the deficit in 2014. £9.0m was spent during the year buying back 1.22m shares.

The performance in the investee companies has generally been steady. The technology sector carries on disrupting many industries and benefits from the fact that it is continuing to penetrate enterprises more than ever and is more pervasive for the consumer in terms of communication, entertainment and commerce. The commodity end of the sector is dominated by hardware devices including phones, tablets and PCs. Volume growth has evaporated in revenue terms for mobile phones, and PCs have experienced a sharp decline. According to International Data Corporation, the volume decline of c.10.6% in 2015 was even worse than the decline of 9.8% in 2013. This has particularly put pressure on many Asian companies which dominate the supply chain. More than half the quoted TMT (technology, media and telecommunications) companies are now listed in Asia. In spite of Herald's global mandate, the Company has only 5% of its assets in this region reflecting the poor investment attractions. Many Asian companies have a concentrated customer list, poor pricing power and poor governance. This has vindicated the policy of remaining focused on the UK and to a lesser extent North America.

The US continues to lead with innovation, but we have found valuations full. The UK has for a number of years been good value and the performance has been enhanced by many takeovers. Over the last 9 years, 66 UK portfolio companies have been acquired. Unfortunately while some consolidation is appropriate and helpful, the serious shortage of capital in our UK market has meant that there have been no UK consolidators, so most companies have been sold to overseas buyers and a few to private equity. We have commented for some years about this problem, but the flight of capital from the quoted UK equity market has now reached a point where we must consider reallocating capital. There is no shortage of entrepreneurialism and innovation in the UK, but an evident shortage of capital, so it seems perverse that we may be forced to exacerbate matters by reducing our own exposure to the UK. We have considered investing in private companies, but we see a worldwide problem of too much capital being tied up in private companies with the quoted markets currently unwilling to provide exits. In the public markets, the larger companies are acquired and at the small end we are fearful of being too exposed to too many early stage companies, with few willing co-investors. Having long been evangelists for the UK, and having achieved an annualised internal rate of return on the UK element of the portfolio of 17.7% since inception in 1994, it is a depressing conclusion to reach. The US has seen a marked contraction in the number of small technology companies and IPOs (initial public offerings) since Sarbanes Oxley but the private venture market, which has surged, seems to be hitting a wall. Investors are marking down valuations of private technology companies. There is promising potential that a number of companies in the US will come to market at sensible valuations, as the private owners come to terms with exits at lower values. There is no doubt that a number of things have conspired to challenge the quoted equity investing markets. There are complex reasons why professional asset allocators have reduced quoted equity, and small capitalisation equities commitments in particular, so much. It does not feel as though the regulators - on both sides of the Atlantic - comprehend the adverse economic consequences of their attempts to protect the investor.

One major current stock market trauma is that commissions have been driven down to a point where it seems the market can no longer function as it has done historically. Until four or five years ago, US IPOs had a roadshow in London. Now rarely do they bother. In light of this, the Manager has decided to open a research office in New York. If US companies no longer come here, we shall have to go there. This is commented on further in the Managers' report.

The positive side effect is that as the more professional investors desert small capitalisation equities in favour of ETFs, Index trackers, hedge funds, private equity and bonds, there are richer potential pickings for the few of us focussed on bottom up stock selection. It feels as though there will be greater returns from stock picking than asset allocation as money and research evaporates in long only investment in the medium term.

There are a number of economic challenges reflected in volatile markets since the year end, but we remain confident that Herald's remit has relative attractions, not least because of increasing market inefficiencies, and are excited that a potential buying opportunity will emerge in the US.

Board

Douglas McDougall has asked to step down from the board at the conclusion of the AGM on 19 April. We are very grateful to Douglas for his contribution over the last fourteen years and will miss his experience and wise counsel. We wish him well for the future.

Continuation vote

The Company's articles of association give shareholders the right to vote at AGMs every third year as to whether the Company should continue to operate as an investment trust. An ordinary resolution is being proposed at this year's AGM, to be held on 19 April 2016, to the effect that the Company should continue as an investment trust. Herald Investment Trust is one of the largest investment trusts specialising in TMT and has performed well since its launch in February 1994. It is the only specialist technology orientated investment trust with a material exposure to the United Kingdom. The Herald board believes that the Manager's focus on smaller capitalisation companies provides exposure to some of the most rapidly growing companies within the Trust's target sectors and that this should continue to provide attractive long term investment opportunities. The directors believe that the prospects for investment in the TMT sectors remain positive and that in Katie Potts the Company is fortunate to be managed by one of the most experienced and successful managers in the sector. The board strongly recommends that shareholders vote in favour of the resolution to continue as an investment trust - the directors intend to vote their own shareholdings in favour.

Julian Cazalet
Chairman

Investment Manager's Report

In the year to 31 December 2015, the NAV appreciated by 8.4%. In the early part of the year, momentum led Asian, European and North American stocks higher, while UK stocks were in the doldrums after heavy redemptions in UK smaller companies funds in 2014 and political apprehension ahead of the election. In the second quarter the geographic differences reversed, and the UK made steady progress for the rest of the year, while the rest of the world corrected sharply before rallying a little towards the year end.

The UK remains the dominant proportion of the portfolio, representing 64% of net assets. The total return of our UK holdings was 10.3%. This compares well to a total return of 8.6% from the general Numis Small Companies Index (including AIM and excluding investment trusts).

Significant takeovers during the year were Kofax, Opsec, Phoenix IT, Chime and Hellermann Tyton. Collectively these five UK takeovers increased our assets by £19.1m during the year. In addition the acquisitions of Incadea and CSR completed during 2015, though they had already been announced in 2014.

GB Group performed particularly well, returning £8.6m (83.5%). Imagination and Toumaz were amongst our poorest UK stocks in 2015. Imagination has experienced difficult trading, but the valuation is now less than the last three year's expenditure on R&D, which has all been expensed. I fear the market has lost confidence that this development will be productive, while the customer base for the existing core products is increasingly dominated by Apple. The outlook for Toumaz is better. Recent discussions in the US with a memory supplier to Toumaz were encouraging.

Historically we have always held around 17.5% in early-stage pre-profit companies within the UK portfolio, but this has fallen to 13.2% (£57m year end market value and 51 companies). In part this reflects negative returns from these stocks of £15.8m during the year: the market became unforgiving towards loss-making businesses. The market is now fearful of having too large an exposure to companies still burning cash, given the shortage of co-investors at an early stage. Over the life of Herald, most of the Company's best returns have come from these early-stage pre-profit companies, such as ARM, Imagination and Autonomy. We invest in the expectation that it will be dead money for a period of time. But if you do not provide capital when such companies need it, they will not exist for the upside.

During 2015 a further £25m was invested in primary placings in the UK, taking the total over the life of the fund to £324m. The outside capital raised net of buybacks has been £45.8m and £95m gross, so it is particularly fulfilling that we have productively supplied primary capital to businesses, and effectively recycled it, without any tax benefits, and still made an annualised return of 17.7% on the UK portfolio. We generally find that there is better value when a company needs development capital, and IPOs have been less attractive when providing an exit to a financial investor.

North America

For the second year running North American takeovers have been even more prolific than UK takeovers as a percentage of their respective portfolios. Six takeovers realised cash of £27.2m. The sterling return for the North American portfolio in 2015 was 8.5%. This compares well with the sterling total return for the Russell 2000 Technology Index of 6.6%. Long-held holdings that fared well were Advent Software (it was taken over), Silicon Motion, Descartes and Pegasystems. In contrast Nimble Storage, Radware and Vasco disappointed for company-specific reasons. The cash realised on North American takeovers that has not been fully reinvested over the last two has been held in dollars awaiting a better pricing opportunity to buy. At the year end, we held £22m in dollars.

Europe Middle East and Africa

The European portfolio remains small. The weakness of the Euro has led to cash flows into the Euro region which has led to a rerating, but profits growth has not been commensurate. The Company's EMEA portfolio has returned 11.8% in sterling terms. The French companies in the portfolio did particularly well, appreciating by 41%. Datatec in South Africa was the main disappointment in this part of the portfolio.

Asia

The Asian portfolio started the year well, but suffered thereafter. The return by the year end was 1.4%. Korea dragged down the average with a return of -9.0%. Our Asian team have been cautious for many months, and still believe that the Shenzen Index is materially overvalued, even after the falls of 2016.

Swap

In 2014 the position was halved, but continued to be a marginal drag in 2015, although only on the income statement because there is a marginal capital gain. We continue to be surprised by how long it is taking for interest rates to normalise, but recent events continue to defer the day.

Portfolio Split by Subsector

Semiconductors was the star sector in 2014 and the laggard in 2015. Other sectors are largely stock specific in performance.

	Market value £m 31/12/2015	% of equity portfolio 31/12/2015	Total return £m 2014	Total return £m 2015
Business Support Services	18.5	3%	(8.0)	9.2
Computer Hardware	9.6	2%	1.2	(3.6)
Computer Services	76.1	12%	4.7	16.2
Electrical Components & Equipment	15.6	2%	0.5	4.5
Fixed Line Telecommunications	32.5	5%	(1.5)	0.9
Internet	33.9	5%	(2.7)	0.7
Media Agencies	62.0	10%	3.0	10.3
Publishing	34.8	5%	(5.6)	4.6
Semiconductors	82.0	13%	25.6	(9.1)
Software	151.1	24%	9.1	19.1
Telecommunications Equipment	31.3	5%	5.0	(2.2)
Other	94.8	15%	(5.1)	8.4
Total	642.1	100%	26.3	58.9

Regulation

For two years the changes associated with AIFMD have been a burden in terms of overhead in time and effort.

The next challenge is the effects of MiFID (the Markets in Financial Instruments Directive). In anticipation of MiFID II and the separation of dealing costs from research and corporate access, the market has conspicuously reduced commissions. Every week we seem to be saying good-bye to another broker contact who has been laid off. I should particularly like to thank those who have provided a helpful service to us for many years, and whose careers have been disrupted through no fault of their own. In particular overseas brokers, who do not have the benefit of corporate retainers, but have the expense of bringing companies to London, have been in retreat.

It is hard to know quite how the situation will settle, but we have to assume as a worst case that it will no longer be economic for overseas brokers to bring smaller companies to London. We have always travelled extensively, and modern communications and a number of data providers ensure a good news flow. Nevertheless, in the smaller companies' world, we are heavily reliant on undertaking our own research with company meetings, which is a heavy burden for a small fund manager, made all the more challenging by market developments. Our essential expertise is knowing our companies first hand. As the availability and quality of brokers' research deteriorates, we could be at a competitive advantage, but it is not a level playing field. We are competing in the US with US based investors who are not so constrained. Already we are nearly always the only UK investors at conferences in the US, which is very different from the market place in which I started.

The most startling change is that US companies no longer do a London roadshow at their IPO. There are increasingly webcasts, but it is an inferior medium when compared to meeting a company face-to-face. In consequence we have decided to open a New York office, because North American companies travel there most.

As a matter of interest, we receive research from over a hundred brokers who cover at least one of the Company's holdings, but no one broker covers more than 34 holdings out of 275, and 111 holdings are covered by only one broker, or even none at all. 200 holdings are researched by three or fewer brokers. It will not be a viable business model for us to pay for research, and no one or even ten brokers stand out as must haves. Perversely we need brokers most in small overseas territories, where we cannot have direct access to companies so easily or as frequently. There is a risk that we make one or two more errors. We find it bizarre that the regulator is making rules which seem so far against protecting shareholders' interests and from our perspective, it is hard to see how London can maintain its status as a leading global fund management centre.

It is ironic that although there is greater regulation than ever, there also seems to be more egregious creative directors' pay and even downright fraud than we ever experienced hitherto. We are fully supportive that directors should be properly paid and rewarded, but dislike the trend to creative packages including nil cost options or restricted stock units, which we believe masks the true cost of running the company, and makes valuation comparisons difficult. Fortunately we have avoided most of the fraudulent or near fraudulent companies, and although there have been some shockers in the UK market, there are even worse examples afar. We think that the reduction in widely available quality research is unhelpful in exposing management mischief.

Sector Trends

The sector continues to offer a host of opportunities. I am more relaxed about the Company's investee companies than the stock markets in which we operate. The Californian internet sector has been hot, and there are allegedly over 100 private companies in the US with valuations in excess of $1bn. In particular the so called "Unicorns" have excited people because companies such as Facebook have scaled with relatively low paid up capital in a remarkably short space of time. This boom was distinctly flagging by the year end, with press reports suggesting that some of the players new to the private development capital market were writing down values, and many have missed their revenue projections. Clearly the quoted markets have become unwholesome owners because when there are net cash outflows, investors are happy to take any takeover premium, which in turn pressurises management to deliver short term numbers to a degree that may not be in the long term interests of shareholders or employees. We always encourage our investee companies to do what is right on a five year view, and not to be short term like the markets. Touch wood we have had a sufficient cushion on performance, and have a closed end fund so we can do that, which I firmly believe in the long run is in shareholders' interests. On the whole private equity funds have a term and in due course will require an exit. Approximately 10 times as much money has been invested in the recent past in private venture and development capital than has been raised through IPOs. In the US last year, only $7.5bn was raised in information technology IPOs, a 74.6% decline on the previous year (source: S&P Capital IQ). There is a big backlog of IPOs which we look forward to with interest.

The UK has also seen a more vibrant venture market, which made me think that stock markets are being disintermediated and we are missing out. An exercise to see what was being funded reassured us that we must patiently wait for the few that move forward. Inevitably some companies will need further funding, and it will probably be a buyers' market.

Technically there are quite interesting developments. Big data is not only creating new database companies, but challenging storage and analytics. Disruptors abound. Handling unstructured data is a different market from the old relationship databases on which computers were originally built. As networks have improved, the PC client is in retreat and there is a reversion to centralised computing. Instead of central mainframes, there are datacentres with racks of servers with far more processing power than any mainframe. Relatively dumb devices such as phones and tablets have become very powerful when used in conjunction with servers.

The defence market seems to be coming back to life as the various conflicts around the world threaten. Security at all levels - Government, corporate and consumer - is an attractive area of growth.

Summary

As ever there are challenges, but we continue to view the opportunities in the sector with enthusiasm.

Time weighted total return by geography in sterling terms, compared with indices

	31/12/2014- 31/12/2015
Asia	0.0%
Europe Middle East and Africa	10.9%
North America	8.5%
UK	10.3%
Foreign Bonds	1.6%
Numis Smaller companies index plus AIM (ex investment trusts)	8.6%
Russell 2000 (small cap) Technology Index	6.6%

Investment Changes (£'000)

	Valuation at 31 December 2014	Net acquisitions/ (disposals)	Appreciation/ (depreciation)	Valuation at 31 December 2015
Equities*
UK	428,995	(34,401)	34,861	429,455
EMEA	23,824	142	2,039	26,005
North America	143,727	(4,607)	11,626	150,746
Asia Pacific	36,025	730	(810)	35,945
Total equities	632,571	(38,136)	47,716	642,151
Bonds:
Euro bonds	4,337	(4,360)	23	-
Total bonds	4,337	(4,360)	23	-
Total investments	636,908	(42,496)	47,739	642,151
Net liquid assets	30,542	35,854	592	66,988
Total assets	667,450	(6,642)	48,331	709,139

The total assets figure above comprises assets less current liabilities before deduction of bank loans and derivative financial instruments.

* Equities includes convertibles and warrants.

Katie Potts

Top Twenty Equity Holdings

AT 31 DECEMBER 2015

A brief description of the twenty largest equity holdings in companies is as follows:

GB Group

GB Group is a global specialist in Identity Data Intelligence. GBG helps organisations' realise the full value of their customer base by recognising and verifying all elements of a consumer's identity at every interaction. Through the application of technology, GB Group protects, predicts and provides information that is used to maximise customer value for some of the largest companies in the UK. The company provides an integrated and comprehensive range of data services to clients allowing them to interact effectively with their customers, improve long term profitability and reduce fraud. Headquartered in Chester (UK) and with 18 offices across the world, GBG provides solutions to many of the world's biggest organisations, including established brands like Nike and Harrods.

Country United Kingdom

% of total assets 2.6

% of issued share capital held 5.6

31/12/15 31/12/14

Valuation (£m) 18.58 10.37

Shares (m) 6.91 7.01

Diploma

Diploma is a group of specialised distribution businesses serving industries with long term growth potential and with the opportunity for sustainable superior margins through the quality of customer service, depth of technical support and value-adding activities. The three sectors the company focuses on are life sciences, seals and controls.

Country United Kingdom

% of total assets 2.5

% of issued share capital held 2.0

31/12/15 31/12/14

Valuation (£m) 17.39 16.16

Shares (m) 2.29 2.30

IDOX

Idox plc is a supplier of software solutions and services to the UK public sector and increasingly to highly regulated asset intensive industries around the world in the wider corporate sector. The Public Sector Software Division is the leading applications provider to UK local government for core functions relating to land, people and property, such as its market leading planning systems and election management software. Over 90% of UK local authorities are now customers. The Division provides public sector organisations with tools to manage information and knowledge, documents, content, business processes and workflow as well as connecting directly with the citizen via the web. The Engineering Information Management Division delivers engineering document control, project collaboration and facility management applications to many leading companies in industries such as oil & gas, architecture and construction, mining, utilities, pharmaceuticals and transportation in North America and around the world. The Group employs over 500 staff located in the UK, the USA, Europe, India and Australia.

Country United Kingdom

% of total assets 2.1

% of issued share capital held 8.0

31/12/15 31/12/14

Valuation (£m) 14.59 11.04

Shares (m) 28.62 27.94

Next Fifteen Communications

Next 15 aims to become the world's largest and most respected specialist communications group. To do this, the Group continues to build a portfolio of businesses that cater to the subtly different needs of the various market sectors and geographies in which it operates. Next 15 Communications employs over 1,250 people across 36 offices in 18 countries, incorporating 16 subsidiary agencies, spanning digital content, marketing, PR, consumer, technology, marketing software, market research, public affairs and policy communications.

Country United Kingdom

% of total assets 1.9

% of issued share capital held 8.2

31/12/15 31/12/14

Valuation (£m) 13.76 8.19

Shares (m) 5.78 5.53

M&C Saatchi

M&C Saatchi is a global marketing services business working for clients across a wide variety of industry sectors. The company was founded in 1995. Starting with a strong base in the UK and Australia, M & C Saatchi have added new agencies and disciplines in Asia, USA and Europe. M&C Saatchi currently has 28 offices worldwide.

Country United Kingdom

% of total assets 1.9

% of issued share capital held 5.7

31/12/15 31/12/14

Valuation (£m) 13.16 13.33

Shares (m) 4.14 4.14

Imagination Technologies Group

Imagination Technologies - a global leader in multimedia, processor, communication and cloud technologies - creates and licenses market-leading processor solutions including graphics, video, vision, CPU and embedded processing, multi-standard communications, cross-platform V.VoIP and VoLTE and cloud connectivity. These silicon and software intellectual property (IP) solutions for systems-on-chip (SoC) are complemented by an extensive portfolio of software, tools and ecosystems. Target markets include mobile phone, connected home consumer, mobile and tablet computing, in-car electronics, networking, telecoms, health, smart energy and connected sensors. Imagination has been particularly successful in selling graphics technology to the mobile phone and LCD TV sectors and is a pioneer in developing Digital Audio Broadcasting Technology (DAB). Imagination Technology incorporates this technology in its "Pure Digital" radio brand, which is a leading supplier of radios in the UK. Imagination's licensees include many of the world's leading semiconductor manufacturers, network operators and OEM/ODMs. Corporate headquarters are located in the United Kingdom, with sales and R&D offices worldwide. Apple is a significant customer and investor in Imagination Technologies.

Country United Kingdom

% of total assets 1.8

% of issued share capital held 3.6

31/12/15 31/12/14

Valuation (£m) 13.05 20.74

Shares (m) 9.89 9.08

NCC Group

As a trusted adviser, NCC Group provides business critical IT assurance and protection to over 15,000 organisations worldwide, The Group provides organisations worldwide with expert software escrow and verification, security testing, website performance, software testing and domain services. NCC has 30 offices across the UK, Europe, North America and Australia.

Country United Kingdom

% of total assets 1.7

% of issued share capital held 1.4

31/12/15 31/12/14

Valuation (£m) 11.87 9.88

Shares (m) 3.96 4.80

Silicon Motion

Silicon Motion is a global leader and pioneer in developing NAND flash controller ICs for solid-state storage devices and specialty RF ICs for mobile devices, they supply more NAND flash controllers than any other company and have one of the broadest portfolios of controller solutions and technologies. Key products are controllers used in embedded storage products such as SSDs and eMMCs, as well as in expandable storage products such as memory cards and USB flash drives. Products are widely used in consumer devices such as smartphones, tablets and PCs and for industrial, enterprise, commercial and other applications. Customers include most of the NAND flash makers, leading technology OEMs, and the majority of storage device module makers. More NAND flash products - especially next-generation flash - produced by Intel, Micron, Samsung, SanDisk, SK Hynix and Toshiba are supported by Silicon Motion controllers than any other company. Silicon Motion is the world's leading merchant supplier of controllers for eMMC embedded memory used in smartphones and tablets, and the leading merchant supplier of controllers for client SSDs used in PCs and other applications. The recent addition of Shannon Systems expands the product portfolio to now include enterprise-grade PCIe SSDs for the Chinese hyperscale data center market. The company was founded in 1995 in San Jose, California and is now headquartered in Taiwan, with design centers and sales offices in Taiwan, Korea, China, Hong Kong, Japan and the US.

Country USA

% of total assets 1.6

% of issued share capital held 1.6

31/12/15 31/12/14

Valuation (£m) 11.70 9.10

Shares (m) 0.55 0.60

SQS

The SQS Group (SQS) is a leading specialist in software quality. The company's competitive edge stems mainly from its software testing methodology, which is based on many years of project experience and specialist knowledge across a wide range of industries. With over 8,000 completed projects, SQS has a strong customer base, including half of the DAX-30, almost a third of the STOXX-50 and 20 FTSE-100 companies. Customers include Allianz, Beazley, BP, Centrica, Commerzbank, Daimler, Deutsche Post, Generali, JP Morgan, Meteor, Reuters, UBS and Volkswagen. Founded in Cologne in 1982, SQS employs around 4,100 staff in offices in Germany, the UK, Australia, Egypt, Finland, France, India, Ireland, Italy, Malaysia, the Netherlands, Norway, Austria, Singapore, Sweden, Switzerland, South Africa, the UAE and the US.

Country United Kingdom

% of total assets 1.6

% of issued share capital held 6.0

31/12/15 31/12/14

Valuation (£m) 11.12 10.84

Shares (m) 1.89 1.89

Wilmington Group

Wilmington Group plc is one of the UK's leading providers and partner of choice for information, education and networking in Risk & Compliance, Finance and Legal as well as the Insight leader in a number of chosen industries. The Group provides business intelligence, information, training, education, events and support services for a variety of markets including the accountancy, banking, charities, financial services, healthcare, insurance, legal, and pensions sectors.

Country United Kingdom

% of total assets 1.5

% of issued share capital held 4.7

31/12/15 31/12/14

Valuation (£m) 10.75 9.52

Shares (m) 4.09 4.39

Eckoh

Eckoh is a leader in secure payment technology, specialising in assisting organisations that take payments securely when the payment card is not present, for example over the phone, web or mobile. As a PCI DSS Level One Compliant Service Provider, corporate customers trust Eckoh to protect their contact centre and customers from payment card fraud and breaches. In addition to these payments products Eckoh has a portfolio of customer service solutions that target organisations with contact centres. These services enable organisations to manage their customer communications more efficiently and securely. Eckoh's multi-channel products give customers the ability to make enquiries, get information or make transactions over the phone, web or mobile without needing to interact with a contact centre agent or advisor.

Country United Kingdom

% of total assets 1.3

% of issued share capital held 8.5

31/12/15 31/12/14

Valuation (£m) 9.46 8.62

Shares (m) 18.91 19.16

Alternative Networks

Alternative is one of the UK's leading independent technology and telecommunications service providers. Established in 1994, it has grown steadily and can provide a complete communications and technology portfolio, including cloud computing, virtualisation, managed hosting, fixed line voice, mobile, systems, IP networks and complex billing software solutions. Based across five offices in the UK in total Alternative employs over 600 members of staff.

Country United Kingdom

% of total assets 1.2

% of issued share capital held 3.7

31/12/15 31/12/14

Valuation (£m) 8.76 9.40

Shares (m) 1.81 1.81

Telecom Plus

Telecom Plus, which owns and operates the Utility Warehouse brand, is the UK's only fully integrated provider of a wide range of competitively priced utility services, spanning both the communications and energy markets. Telecom Plus provides homes and small businesses throughout the UK with Home Phone, Broadband, Mobile, Gas and Electricity all on a unified bill. Telecom Plus was incorporated in 1996 and began operations in 1997 providing a unique range of low-cost telephony services to the residential and SOHO markets. They use the collective buying power of individual users to negotiate bulk buying deals with major suppliers, passing the benefit back to their customers. Telecom Plus does not advertise and has no shops. Instead, they rely on word of mouth recommendations from satisfied customers and distributors to grow its market share.

Country United Kingdom

% of total assets 1.2

% of issued share capital held 1.0

31/12/15 31/12/14

Valuation (£m) 8.73 9.37

Shares (m) 0.82 0.75

CityFibre

CityFibre enables gigabit connectivity through designing, building, owning, and operating fibre optic network infrastructure. It is the largest independent wholesale provider of fibre infrastructure to mid-sized cities and major towns across the UK, providing gigabit-capable infrastructure for enterprise and public sector organisations, service providers, mobile network operators and businesses. CityFibre owns and operates over 600 route kms of local access fibre networks serving over 1,000 customer locations in 61 towns and cities in the UK. In January 2016, CityFibre completed the acquisition of additional network infrastructure assets from KCOM for a cash consideration of £90.0 million. The acquired assets include a further 2,200 route kms of ducted infrastructure together with fibre optic cable and access chambers.

Country United Kingdom

% of total assets 1.2

% of issued share capital held 5.4

31/12/15 31/12/14

Valuation (£m) 8.67 5.34

Shares (m) 14.22 8.62

Euromoney Institutional Investor

Euromoney is an international business-to-business information and events group listed on the London Stock Exchange, with 2,300 employees worldwide and a portfolio of over 50 specialist businesses spanning macroeconomic data, investment research, news and market analysis, industry forums and institutes, financial training and excellence awards. Primary sectors include asset management, banking and capital markets, specialist finance, metals, mining, energy and commodities. Euromoney's portfolio includes brands such as Euromoney, Institutional Investor, BCA Research, Ned Davis Research, Metal Bulletin, American Metal Market, CEIC Data, EMIS, Petroleum Economist, Insurance Insider, Gulf Publishing Company, Mining INDABA and IJ Global among others. The company's headquarters are in the City of London, with additional main offices in Manhattan, Montreal, Hong Kong, Singapore and Shanghai. The group has a further 20 regional offices. Around a third of Euromoney's revenues are derived from emerging markets.

Country United Kingdom

% of total assets 1.2

% of issued share capital held 0.7

31/12/15 31/12/14

Valuation (£m) 8.41 10.47

Shares (m) 0.85 1.00

Telit Communications
Telit is a leading global enabler of the Internet of Things (IoT). The unique combination of products and services feed data directly into applications and business IT systems to deliver real-time intelligence to businesses across industries. Telit offers cellular, short-range and GNSS modules plus all value added services to connect them over the air, into the cloud and business systems. From Telit Automotive Solutions come 4G LTE and other products meeting strict automotive OEM standards. Through its business unit m2mAIR, the company provides an IoT focused Platform as a Service (PaaS), managed and value added services, application enablement and connectivity covering the mobile network domain and device to cloud/backend services. With over 13 years exclusively in m2m, Telit constantly advances technology through eight R&D centres around the globe, marketing products and services in over 80 countries. Telit provides customer support and design-in assistance from 35 sales and support offices and a global distributor network.		Country United Kingdom % of total assets 1.1 % of issued share capital held 3.2 31/12/15 31/12/14 Valuation (£m) 7.91 12.00 Shares (m) 3.70 4.98
Ebiquity
Ebiquity is a leading independent marketing analytics specialist. Brands worldwide use Ebiquity's expertise and objective data insights to exploit an evolving marketing landscape and achieve business success. The main offerings include marketing performance optimization, media value measurement and market intelligence.		Country United Kingdom % of total assets 1.1 % of issued share capital held 7.1 31/12/15 31/12/14 Valuation (£m) 7.58 6.26 Shares (m) 5.49 5.49
Descartes Systems Group
Descartes is a global leader in providing on-demand, software-as-a-service solutions focused on improving the productivity, performance and security of logistics-intensive businesses. Descartes has over 220,000 connected parties using its cloud-based services. Customers use Descartes modular, software-as-a-service solutions to route, schedule, track and measure delivery resources; plan, allocate and execute shipments; rate, audit and pay transportation invoices; access global trade data; file customs and security documents for imports and exports; and complete numerous other logistics processes by participating in the world's largest, collaborative multimodal logistics community. Descartes' headquarters are in Waterloo, Ontario, Canada and they have offices and partners around the world.		Country United Kingdom % of total assets 1.1 % of issued share capital held 0.7 31/12/15 31/12/14 Valuation (£m) 7.49 5.23 Shares (m) 0.55 0.55

Bango
Formed in 1999, Bango was the pioneer of mobile internet payments, partnering with leading operators to launch 'charge to phone bill' services and opening-up mobile payments to early adopters and major content publishers. Bango's payment platform is deployed with the world's leading app stores. Global leaders plugging into Bango include Amazon, BlackBerry, Facebook, Google, Samsung, Microsoft and Mozilla. As mobile payment activity increases, Bango builds an ever larger pool of 'billable identities', and all connected customers benefit from Bango's ability to provide a frictionless payment experience. Bango has launched Direct Carrier Billing into more than 140 mobile operator markets and holds more than 200 million billable mobile identities.		Country United Kingdom % of total assets 1.0 % of issued share capital held 12.5 31/12/15 31/12/14 Valuation (£m) 7.40 7.11 Shares (m) 8.05 6.29
Dotdigital
Dotdigital's flagship product, dotmailer, is a powerful email and multi-channel marketing automation platform with tools that enable marketers to efficiently create, manage, execute and evaluate effective targeted campaigns. In addition to its automation technologies, the Group also provides expert multi-channel marketing consultancy and services for businesses seeking to maximise customer acquisition, conversion and retention. The company is headquartered in London and employed 190 staff at the end of June 2015.		Country United Kingdom % of total assets 1.0 % of issued share capital held 4.6 31/12/15 31/12/14 Valuation (£m) 7.08 3.51 Shares (m) 13.49 12.12

DISTRIBUtion Of Investments

Classification	UK %	EMEA %	North America %	Japan & Asia Pacific %	2015 Total %	2014 Total %
OIL & GAS	1.5	-	0.5	-	2.0	1.6
Oil Equipment, Services & Distribution	0.8	-	-	-	0.8	0.5
Alternative Energy	0.7	-	0.5	-	1.2	1.1
BASIC MATERIALS	0.2	-	-	0.3	0.5	0.5
Chemicals	0.2	-	-	0.3	0.5	0.5
INDUSTRIALS	8.3	0.3	1.6	1.2	11.4	11.4
Construction & Materials	-	-	0.1	-	0.1	0.1
Aerospace & Defence	0.7	-	-	-	0.7	0.5
Electronic & Electrical Equipment	1.7	0.3	0.9	0.6	3.5	3.8
Industrial Engineering	-	-	-	0.1	0.1	0.1
Support Services	5.9	-	0.6	0.5	7.0	6.9
CONSUMER GOODS	0.5	-	0.1	-	0.6	0.8
Household Goods & Home Construction	-	-	-	-	-	0.1
Leisure Goods	0.5	-	0.1	-	0.6	0.7
HEALTH CARE	0.8	0.1	0.2	-	1.1	1.1
Health Care Equipment & Services	0.8	0.1	0.2	-	1.1	1.1
CONSUMER SERVICES	13.3	0.1	0.8	0.6	14.8	13.7
General Retailers	-	-	-	0.3	0.3	0.3
Media	13.3	0.1	0.8	0.3	14.5	13.4
TELECOMMUNICATIONS	4.2	-	0.5	-	4.7	4.1
Fixed Line Telecommunications	4.1	-	0.5	-	4.6	4.0
Mobile Telecommunications	0.1	-	-	-	0.1	0.1
FINANCIALS	1.2	-	0.1	-	1.3	1.0
Financial Services	0.3	-	0.1	-	0.4	0.4
Equity Investment Instruments	0.7	-	-	-	0.7	0.6
Nonequity Investment Instruments	0.2	-	-	-	0.2	-
TECHNOLOGY	30.6	3.1	17.5	3.0	54.2	60.6
Software & Computer Services	24.5	1.8	9.4	1.2	36.9	38.4
Technology Hardware & Equipment	6.1	1.3	8.1	1.8	17.3	22.2
TOTAL EQUITIES	60.6	3.6	21.3	5.1	90.6	-
(including convertibles and warrants)
Total equities - 2014	64.3	3.6	21.5	5.4	-	94.8
(including convertibles and warrants)
BONDS	-	-	-	-	-	0.6
NET LIQUID ASSETS	9.4	-	-	-	9.4	4.6
TOTAL ASSETS	70.0	3.6	21.3	5.1	100.0	-
(before deduction of bank loans and derivative
financial instruments)
Total assets - 2014	68.9	4.2	21.5	5.4	-	100.0
BANK LOANS	(3.5)	-	-	-	(3.5)	(3.8)
DERIVATIVE FINANCIAL INSTRUMENTS	(1.8)	-	-	-	(1.8)	(2.1)
SHAREHOLDERS' FUNDS	64.7	3.6	21.3	5.1	94.7	-
Shareholders' Funds - 2014	63.0	4.2	21.5	5.4	-	94.1
Number of equity investments
(including convertibles and warrants)	160	24	67	43	294	295

Income Statement

FOR THE YEAR ENDED 31 DECEMBER

	Revenue £'000	2015 Capital £'000	Total £'000	Revenue £'000	2014 Capital £'000	Total £'000
Gains on investments	-	50,105	50,105	-	17,208	17,208
Currency gains	-	592	592	-	1,189	1,189
Gains/(losses) on derivative instruments	-	532	532	-	(9,405)	(9,405)
Income	9,136	-	9,136	8,245	-	8,245
Investment management fee	(6,692)	-	(6,692)	(6,283)	-	(6,283)
Other administrative expenses	(454)	(5)	(459)	(436)	(1)	(437)
Profit before finance costs and taxation	1,990	51,224	53,214	1,526	8,991	10,517
Finance costs of borrowings	(1,793)	-	(1,793)	(2,783)	-	(2,783)
Profit/(loss) before taxation	197	51,224	51,421	(1,257)	8,991	7,734
Tax	(233)	-	(233)	(207)	-	(207)
(Loss)/profit after taxation	(36)	51,224	51,188	(1,464)	8,991	7,527
(Loss)/profit per ordinary share (basic and diluted)	(0.05)p	66.44p	66.39p	(1.89)p	11.59p	9.70p

There is no final dividend proposed (2014 - nil).

The total column of this statement is the profit and loss account of the Company.

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

As there are no items of other comprehensive income, the profit for the year is also the total comprehensive income for the year.

Balance Sheet

AT 31 DECEMBER

	2015 £'000	2015 £'000	2014 £'000	2014 £'000
Fixed assets
Investments held at fair value through profit or loss		642,151		636,908
Current assets
Cash and cash equivalents	69,360		30,850
Other receivables	1,411		1,253
	70,771		32,103
Current liabilities
Derivative financial instruments	(13,002)		(13,534)
Other payables	(28,783)		(26,560)
	(41,785)		(40,094)
Net current assets/(liabilities)		28,986		(7,991)
TOTAL NET ASSETS		671,137		628,917
Capital and reserves
Called up share capital		19,028		19,335
Share premium		73,738		73,738
Capital redemption reserve		2,924		2,617
Capital reserve		575,202		532,946
Revenue reserve		245		281
SHAREHOLDERS' FUNDS		671,137		628,917
NET ASSET VALUE PER ORDINARY SHARE (including current year revenue)		881.78p		813.19p
NET ASSET VALUE PER ORDINARY SHARE (excluding current year revenue)		881.83p		815.08p

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2015

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Share- holders' funds £'000
Shareholders' funds at 1 January 2015	19,335	73,738	2,617	532,946	281	628,917
Profit/(loss) after taxation	-	-	-	51,224	(36)	51,188
Shares bought back	(307)	-	307	(8,968)	-	(8,968)
Shareholders' funds at 31 December 2015	19,028	73,738	2,924	575,202	245	671,137

FOR THE YEAR ENDED 31 DECEMBER 2014

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Share- holders' funds £'000
Shareholders' funds at 1 January 2014	19,420	73,738	2,532	526,168	1,745	623,603
Profit/(loss) after taxation	-	-	-	8,991	(1,464)	7,527
Shares bought back	(85)	-	85	(2,213)	-	(2,213)
Shareholders' funds at 31 December 2014	19,335	73,738	2,617	532,946	281	628,917

Cash Flow Statement

FOR THE YEAR ENDED 31 DECEMBER

	2015 £'000	2015 £'000	2014 £'000	2014 £'000
Profit before finance costs and taxation	53,214		10,517
Adjustments for gains on investments	(50,637)		(7,803)
Realised losses on interest rate swap	-		(9,806)
(Increase) / decrease in accrued income	(120)		313
Purchase of investments	(88,164)		(85,031)
Sale of investments	135,118		109,715
Increase in other receivables	(32)		(7)
Increase in other payables	4		88
Amortisation of fixed income book cost	33		356
Income tax suffered	(5)		(5)
Overseas tax suffered	(233)		(207)
Net cash inflow / (outflow) from operating activities		49,178		18,130
Finance activities
Bank loans drawn down	-		25,000
Bank loans repaid	-		(25,000)
Interest paid on loan and derivatives	(1,700)		(3,075)
Shares repurchased	(8,968)		(2,213)
Net cash outflow from financing activities		(10,668)		(5,288)
Increase in cash and cash equivalents		38,510		12,842
Cash and cash equivalents at the start of the year		30,850		18,008
Cash and cash equivalents at the end of the year		69,360		30,850
Comprised of:
Cash and cash equivalents		69,360		30,850

Income

	2015 £'000	2014 £'000
Income from investments and interest receivable
Total income	9,136	8,245
Total income comprises:
Dividends from equity securities designated at fair value through profit or loss	8,899	7,760
Interest from financial assets designated at fair value through profit or loss	232	448
Other income	5	37
	9,136	8,245

Business model and status

The Company is an investment company within the meaning of Section 833 of the Companies Act 2006.

The Company carries on business as an investment trust. It was approved by HM Revenue & Customs as an investment trust under Section 1158 of the Corporation Tax Act 2010 for the year ended 31 December 2014, subject to matters that may arise from any subsequent enquiry by HM Revenue & Customs into the Company's tax return. In the opinion of the Directors the Company has subsequently conducted its affairs so as to enable it to continue to seek such approval. In accordance with recent changes to Section 1158, the Company has obtained approval as an investment trust from HM Revenue & Customs for accounting periods commencing on or after 1 January 2015.

Objective

The Company's objective is to achieve capital appreciation through investments in smaller quoted companies, in the areas of telecommunications, multi-media and technology (TMT). Investments may be made across the world. The business activities of investee companies will include information technology, broadcasting, printing and publishing and the supply of equipment and services to these companies.

Investment policy - strategy

While the policy is global investment in the above target areas, the approach is to construct a diversified portfolio through the identification of individual companies which offer long term growth potential, typically over a five year horizon or more. The portfolio is actively managed and does not seek to track any comparative index. With a remit to invest in smaller companies with market capitalisation generally below $2bn, there tends to be a correlation with the performance of smaller companies, as well as those of the technology sector. A degree of volatility relative to the overall market should be expected.

The risk associated with the illiquidity of smaller companies is reduced by generally restricting the stake in any one company to less than 10% of the shares in issue. A number of investments are in early stage companies, which have a higher stock specific risk but the potential for above average growth. Stock specific risk is reduced by having a diversified portfolio of over 250 holdings. In addition, to contain the risk of any one holding, the Manager generally takes profits when a holding reaches more than 5% of the portfolio. The Manager actively manages the exposure within the constraint that illiquid positions cannot be traded for short term movements.

The Company has a policy not to invest more than 15% of gross assets in other UK listed investment companies.

From time to time, fixed interest holdings, non equity or unlisted investments may be held on an opportunistic basis.

The Company recognises the long term advantages of gearing and has a maximum gearing limit of 50% of net assets. Borrowings are invested primarily in equity markets but the Manager is entitled to invest in other securities in the companies in the target areas when it is considered that the investment grounds merit the Company taking a geared position. The Board's intention is to gear the portfolio when appropriate. Gearing levels are monitored closely by the Manager and reviewed by Directors at each board meeting.

The Company may use derivatives which will be principally, but not exclusively, for the purpose of efficient portfolio management (i.e. for the purpose of reducing, transferring or eliminating investment risk in its investments, including protection against currency risk).

Share capital

At 31 December 2015 the Company's capital structure consisted of 76,111,546 ordinary shares of 25p each (2014 - 77,339,546 ordinary shares). During the year 1,228,000 (2014 - 340,000) shares were bought back and cancelled. There are no restrictions concerning the holding or transfer of the Company's ordinary shares and there are no special rights attached to any of the shares. On a winding up, after meeting the liabilities of the Company, the surplus assets would be paid to ordinary shareholders in proportion to their shareholdings.

Investment management agreement

The management of the Company and the implementation of its investment strategy is contracted to Herald Investment Management Limited ('HIML'). HIML is authorised and regulated by the Financial Conduct Authority.

The management contract is subject to 12 months' notice by either party. The senior director of HIML with prime responsibility for the management of the Company's portfolio is Katie Potts, who is also a substantial shareholder of HIML Holdings Limited, the parent company of HIML. HIML is remunerated at an annual rate of 1.0% of the Company's net asset value calculated using middle market prices. Compensation fees would only be payable in respect of this 12 month period if termination were to occur sooner. Careful consideration has been given by the board as to the basis on which the management fee is charged. The board considers that maintaining an appropriate level of ongoing charges for a specialist trust is in the best interest of all shareholders. The board is also of the view that calculating the fee with reference to performance would be unlikely to exert a positive influence over the long term performance.

The board is of the opinion that the continued appointment of HIML as investment manager, on the terms agreed, is in the interests of shareholders due to the experience of the Manager and the quality of information provided to the board.

Acquisition of own shares

At the Company's AGM held on 21 April 2015 the Company was authorised to purchase up to 11,585,702 of the Company's ordinary shares (14.99% of its ordinary share capital in issue at that time). During the year to 31 December 2015 the Company bought back 1,228,000 ordinary shares (nominal value £307,000 which comprised 1.59% of the issued share capital at 1 January 2015) on the London Stock Exchange for cancellation. The board continues to believe that the ability of the Company to purchase its own ordinary shares in the market will potentially benefit all shareholders of the Company. The repurchase of ordinary shares at a discount to the underlying net asset value ('NAV') should enhance the NAV per ordinary share of the remaining shares and may also enable the Company to address more effectively any imbalance between supply and demand for the Company's ordinary shares.

Significant financial issues relating to the 2015 financial statements

The UK Corporate Governance Code requires us to describe any significant issues considered in relation to the financial statements and how those issues were addressed. There were no significant issues.

Borrowings

The Company had a £50 million multi-currency variable rate loan facility with The Royal Bank of Scotland plc, which expired in December 2014 with full repayment of the £25 million that was drawndown. This was replaced on 31 December 2014 with a sterling loan facility of £25 million and a £25 million multi-currency revolving advance loan maturing 31 December 2017. The sterling loan was drawndown in full on 31 December 2015.

At 31 December 2015, there were outstanding drawings of £25 million (2014 - £25 million). Interest on the loan is payable in quarterly instalments in January, April, July and October. The estimated repayment value of the loan at 31 December 2015 was £25 million. The indicative costs of repaying the loan as at 31 December 2015 were not materially different in the context of the above figures.

The interest on the facilities has been fixed for the long term through a 30 year interest rate swap but may vary on periodic renewals of the debt facility to the extent that the mark up over LIBOR charged by a lending bank varies. The fair value of the interest rate swap contract at 31 December 2015 was an estimated liability of £13.0 million (2014 - liability of £13.5 million) which was based on the swap provider's valuation.

The interest rate swap has been disclosed as due within one year as the Company can close out the swap contract at its discretion.

The loan has been disclosed as due within one year as the Company has an unconditional and irrevocable right to prepay the advance under the terms and conditions of the loan agreement. In connection with the revolving facility, the duration of the advance is 3 or 6 months and the decision to rollover the loan is made at quarterly board meetings based on circumstances prevailing at the time. The decision to continue with the swap arrangement is reviewed at the same time as the loan agreement.

Principal risks and uncertainties

In accordance with the corporate objective of maximising capital appreciation the Company invests in securities on a worldwide basis. The Company makes use of gearing to achieve improved performance in rising markets and has an interest rate swap, the purpose of which is to hedge the variability in cash flows arising from interest rate fluctuations on bank loans. The Company's other financial instruments consist of cash, short term debtors and creditors.

The main risks arising from the Company's financial instruments are:

A. Market Risk

(i) Other price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movement;

(ii) Interest rate risk, being the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates; and

(iii) Foreign currency risk, being the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

B. Credit Risk

Being the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

The Company is exposed to counterparty credit risk from the parties with which it trades and will bear the risk of settlement default. Counterparty credit risk to the Company arises from transactions to purchase or sell investments and through interest rate swap transactions held within the portfolio.

There were no past or impaired assets as of 31 December 2015 (31 December 2014: nil).

The counterparties engaged with the Company are well recognised and regulated entities.

C. Liquidity Risk

Being the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

These risks and the policies for managing them have been applied throughout the year and are summarised below.

A. Market Risk

(i) Other Price Risk

The Company's investment portfolio is exposed to market price fluctuations which are monitored by the Manager in pursuance of the corporate objective. Securities held by the Company are valued at bid prices, whereas material unlisted investments are valued by the directors on the basis of the latest information in line with the relevant principles of the International Private Equity and Venture Capital Valuation Guidelines (Accounting Policy 1(b)). These valuations also represent the fair value of the investments.

Other Price Risk Sensitivity

20.0% of the Company's equity investments at 31 December 2015 (2014 - 26.6%) were listed on the main list of the London Stock Exchange and a further 44.1% (2014 - 39.3%) on AIM. The NASDAQ Stock Exchange accounts for 19.0% (2014 - 22.6%), New York Stock Exchange for 3.9% (2014: nil%) and other stock exchanges 13.0% (2014 - 11.5%). A 10% increase in stock prices at 31 December 2015 would have increased total net assets and profit & loss after taxation by £64,215,000 (2014 - £63,200,000). A decrease of 10% would have had an equal but opposite effect. The portfolio does not target any exchange as a comparative index, and the performance of the portfolio has a low correlation to generally used indices.

The shares of Herald Investment Trust plc have an underlying NAV per share. The NAV per share of Herald Investment Trust plc fluctuates on a daily basis. In addition, there is volatility in the discount/premium the share price has to NAV.

(ii) Interest Rate Risk

The majority of the Company's assets are equity shares and other investments which neither pay interest nor have a maturity date. However, the Company does hold convertible bonds, and held Government bonds during the period, the interest rate and maturity dates of which are detailed below. Interest is accrued on sterling cash balances at a rate linked to the UK base rate.

The Company has borrowings. The aim of the use of gearing is to enhance long term returns to shareholders by investing borrowed funds in equities and other assets. Gearing is actively managed. How and where borrowings are invested is reviewed by the board in consultation with the Manager at every board meeting. In light of the decisions made, appropriate adjustments to the gearing position are then made by the Manager.

At the year end the Company had borrowings of £25 million (2014 - £25 million). Under the terms of an interest rate swap, the interest payable on the bank loans has been fixed.

The interest rate risk profile of the financial assets and financial liabilities at 31 December was:

Financial Assets

	2015 Fair value £'000	2015 Weighted average interest rate/ interest rate	2015 Weighted average period until maturity/ maturity date	2014 Fair value £'000	2014 Weighted average interest rate/ interest rate	2014 Weighted average period until maturity/ maturity date
Fixed rate:
Euro bonds	-	-	-	4,337	4.9%	0.3 years
UK convertible bonds	2,182	9.7%	2.3 Years	4,615	8.7%	2.7 years
Cash:
Other overseas currencies	32,439			19,193
Sterling	36,921	1.0%		11,657	1.0%
	69,360			30,850

The cash deposits generally comprise call or short term money market deposits with original maturities of less than 3 months which are repayable on demand. The benchmark rate which determines the interest payments received on cash balances is the bank base rate.

Financial Liabilities

	2015 £'000	2015 Net interest rate paid	2015 Loan facility expired/expires	2014 £'000	2014 Net interest rate paid	2014 Loan facility expired/expires
Bank Loan	25,000	1.7%	Dec 2017	25,000	1.9%	Dec 2014
		1.7%			1.9%
Interest rate swap	25,000	4.3%		25,000	4.3%
Total		6.0%			6.2%

At 31 December 2015, the Company had a committed revolving credit facility of £25 million (2014: £25m), with a cost associated cost of 0.63% for unutilised amounts.

The effective fixed rate of interest on the loans of 6.00% (2014 - 6.22%) reflects a weighted average variable interest rate paid of 1.68% (2014 - 1.88%), with a further weighted average of 4.32% paid on the swap (2014 - 4.34%). The Company's facilities are rolling on a quarterly basis with the facilities expiring in December 2017.

While the 30 year swap remains in place, the net interest payable will effectively be fixed for the duration of the term of the loan facilities.

2015

Notional

contract

amount

£'000

2015

Fair

value

assets

£'000

2015

Fair

value

liabilities

£'000

2015

Fair

value

balance

£'000

2014

Notional

contract

amount

£'000

2014

Fair

value

assets

£'000

2014

Fair

value

liabilities

£'000

2014

Fair

value

balance

£'000

Total derivative assets/(liabilities)

25,000

9,928

(22,930)

(13,002)

25,000

10,256

(23,790)

(13,534)

Interest rate risk sensitivity

(a) Cash
An increase of 100 basis points in interest rates as at 31 December 2015 would have a direct effect on net assets. Based on the position at 31 December 2015, over a full year, an increase of 100 basis points would have increased the profit & loss after taxation by £694,000 (2014 - £309,000) and would have increased the net asset value per share by 0.91p (2014 - 0.40p). The calculations are based on the cash balances as at the respective balance sheet dates and are not representative of the year as a whole.

(b) Fixed rate bonds
An increase of 100 basis points in bond yields as at 31 December 2015 would have decreased total net assets and profit & loss after taxation by £nil (2014 - £16,000) and would have decreased the net asset value per share by nil (2014 - 0.02p). A decrease in bond yields would have had an equal and opposite effect. The convertible loan stocks having an element of equity are not included in this analysis as given the nature of the businesses and the risk profile of the balance sheets they are considered to have more equity like characteristics.

(c) Bank loans
The effect of an increase or decrease of 100 basis points in 3 month LIBOR interest rates as at 31 December 2015 on the interest cost of the bank loans and the net income return has been eliminated through a 30 year floating interest rate to fixed interest rate swap. The swap generates payments or charges that offset changes in the 3 month LIBOR interest rate, so that the interest payable on the bank loans is effectively converted to a fixed rate loan at 4.8975% (2014 - 4.8975%) plus margin cost. The initial term of the swap on commencement at 30 years did not match the term of the loans, therefore, hedge accounting is not used and changes in the fair value of the swap are captured in the profit & loss after taxation as set out in (d) below.

(d) Floating interest rate to fixed interest rate swap
A decrease of 100 basis points on 30 year interest rates as at 31 December 2015 would have a direct effect on the fair value of the swap and net assets. Based on the position as at 31 December 2015, over a full year, a decrease of 100 basis points would have decreased the gains on investments and profit & loss after taxation by £5,993,000 (2014 - £6,285,000) and would have decreased the net asset value per share by 7.87p (2014 - 8.13p). An increase of 100 basis points would have had an equal but opposite effect.

(iii) Foreign Currency Risk

The Company's reporting currency is sterling, but investments are made in overseas markets as well as the United Kingdom and the asset value can be affected by movements in foreign currency exchange rates.

Furthermore many companies trade internationally both through foreign subsidiaries, and through exports. The greatest foreign currency risk occurs when companies have a divergence in currencies for costs and revenues. A much less risky exposure to currency is straight translation of sales and profits. However the location of the stock market quote only has a limited correlation to the costs, revenues and even activities of those companies, and so this note should not be regarded as a reliable guide to the sensitivity of the portfolio to currency movements. For example, the holdings in the portfolio that have suffered most from US$ weakness are UK companies with dollar revenues and sterling costs.

The Company does not hedge the sterling value of investments that are priced in other currencies. Overseas income is subject to currency fluctuations. The Company does not hedge these currency fluctuations because it is impossible to quantify the effect for the reasons stated above. However, from time to time the Manager takes a view by holding financial assets or liabilities in overseas currencies.

Exposure to currency risk through asset allocation by currency of listing is indicated below:

At 31 December 2015

	Investments £'000	Cash and deposits £'000	Loans £'000	Other receivables and payables* £'000	Net exposure £'000
US dollar	156,000	22,123	-	23	178,146
Norwegian krone	7,362	3,833	-	-	11,195
Korean won	11,410	-	-	138	11,548
Taiwan dollar	8,451	6,469	-	-	14,920
Euro	17,259	12	-	72	17,343
Other overseas currencies	12,217	2	-	12	12,231
Exposure to currency risk on translation of valuations of securities listed in overseas currencies	212,699	32,439	-	245	245,383
Sterling	429,452	36,921	(25,000)	(15,619)	425,754
	642,151	69,360	(25,000)	(15,374)	671,137

*Includes net non-monetary assets of £nil.

At 31 December 2014

	Investments £'000	Cash and deposits £'000	Loans £'000	Other receivables and payables * £'000	Net exposure £'000
US dollar	145,250	15,534	-	44	160,828
Norwegian krone	4,337	-	-	135	4,472
Korean won	13,852	-	-	139	13,991
Taiwan dollar	11,842	3,648	-	-	15,490
Euro	14,606	11	-	26	14,643
Other overseas currencies	18,024	-	-	11	18,035
Exposure to currency risk on translation of valuations of securities listed in overseas currencies	207,911	19,193	-	355	227,459
Sterling	428,997	11,657	(25,000)	(14,196)	401,458
	636,908	30,850	(25,000)	(13,841)	628,917

*Includes net non-monetary assets of £nil.

Foreign currency risk sensitivity

At 31 December 2015, had sterling strengthened by 10% (2014: 10%) in relation to all currencies, with all other variables held constant, total net assets and profit and loss after taxation would have decreased by the amounts shown below based solely on translation of securities quoted in currencies overseas. A 10% (2014 - 10%) weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts. However, companies whose cost base diverges in currency terms from its sales will in the longer term have a significantly greater effect on valuation than simple translation. In the short term investee companies generally cover their currency exposure to varying degrees. There is insufficient publicly disclosed information to quantify this, but in the long term this effect is expected to dwarf simple translation of foreign listings in terms of both risk and reward, because many investee companies trade globally. Furthermore, the country of listing is not necessarily an indication of the geography of some or even any operational activities for investee companies. The Manager does not use financial instruments to protect against currency movements. From time to time financial leverage has been made using debt in overseas currencies.

	2015 £'000	2014 £'000
US dollar	17,815	16,083
Norwegian krone	1,120	447
Korean won	1,155	1,399
Taiwan dollar	1,492	1,549
Euro	1,734	1,464
Other overseas currencies	1,223	1,804
	24,539	22,746

B. Credit Risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment which it has entered into with the Company. The Manager monitors counterparty risk on an ongoing basis.

The Company has investments in convertible loan stocks that have an element of equity. These securities are viewed as having a risk profile similar to the equity holdings. This is because the convertibles held are in nascent technology companies that may be loss making and may have weak balance sheets. For this reason these stocks are categorised as equity holdings.

Credit Risk Exposure

The exposure to credit risk at 31 December was:

	2015 £'000	2014 £'000
Fixed interest investments	-	4,337
Cash and cash equivalents	69,360	30,850
Other receivables	1,411	1,253
	70,771	36,440

During the year, the maximum exposure in fixed interest investments was £4,342,000 (2014 - £18,813,000) and the minimum £nil (2014 - £4,337,000). The maximum exposure in cash was £72,998,000 (2014 - £40,974,000) and the minimum £25,942,000 (2014 - £23,582,000).

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

C. Liquidity Risk

The Company's policy with regard to liquidity is to provide a degree of flexibility so that the portfolio can be repositioned when appropriate and that most of the assets can be realised without an excessive discount to the market price.

(a) Equity securities

The Company's unlisted investments are not readily realisable, but these only amount to 1.8% of the Company's total assets at 31 December 2015 (2014 - 1.5%).

In practice, liquidity in investee companies is imperfect, particularly those with a market value of less than £100 million. To reduce this liquidity risk it is the policy to diversify the holdings and generally to restrict the holding in any one company to less than 10% of the share capital of that company. Furthermore the guideline is for no single investment to account for more than 5% of the assets of the Company.

The market valuation of each underlying security gives an indication of value, but the price at which an investment can be made or realised can diverge materially from the bid or offer price depending on market conditions generally and particularly to each investment. 25.9% (£163 million) (2014 - 29% (£183 million)) of the portfolio is invested in listed stocks with a market capitalisation below £100 million, where liquidity is expected to be more limited. If these stocks had on average a realisable value 20% below the bid price the value of the total fund would be adversely affected by 4.9% (2014 - 5.8%).

(b) Floating interest rate to fixed interest rate swap

The value of the swap is estimated by RBS, the provider of the swap, and is compared to an external model and external prices. We believe the RBS valuation to be reasonable. The RBS valuation methodology and assumptions may change at any time. The valuation used in the report and accounts is the external model.

The swap valuation gives an indication of fair value, but the price at which the swap can be unwound or realised may diverge materially from this valuation depending on market conditions and liquidity.

Liquidity Risk Exposure

Contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be required are as follows:

	2015 One year or less £'000	2014 One year or less £'000
Bank loans	25,106	25,120
Derivative financial instruments	13,271	13,808
Other payables	3,508	1,362
	41,885	40,290

Fair Value of Financial Instruments

The Company's investments and derivative financial instruments, as disclosed in the Company's balance sheet, are valued at fair value.

The Company has chosen to adopt sections 11 and 12 from FRS 102 to account for its financial instruments.

The fair value as at the reporting date has been estimated using the following fair value hierarchy:

Level (a) Quoted prices for identical instruments in active markets.

A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis.

Level (b) Prices of a recent transaction for identical instruments.

When quoted prices are unavailable, the price of a recent transaction for an identical asset provides evidence of fair value as long as there has not been a significant change in economic circumstances or a significant lapse of time since the transaction took place.

Level (c) Valuation techniques that use:

(i) Observable market data or

(ii) Non-observable data

When the market for the asset is not active and recent transactions of an identical asset on their own are not a good estimate, the fair value is estimated by using an alternative valuation technique. Such valuation techniques will, where possible, maximise the use of observable market data inputs as opposed to non-observable entity determined data inputs.

The Investment Manager considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

The analysis of the valuation basis for the financial instruments based on the hierarchy as at 31 December is as follows:

At 31 December 2015

	Level (a) £'000	Level (b) £'000	Level (c) (i) £'000	Level (c) (ii) £'000	Total £'000
Financial assets
Equity investments	629,713	-	-	10,256	639,969
Other debt securities	-	-	-	2,182	2,182
Current assets	70,771	-	-	-	70,771
Total assets	700,484	-	-	12,438	712,922
Financial liabilities
Bank loans	25,000	-	-	-	25,000
Derivatives	-	-	13,002	-	13,002
Current liabilities (excluding bank loans)	3,783	-	-	-	3,783
Total liabilities	28,783	-	13,002	-	41,785
Total net assets	671,701	-	(13,002)	12,438	671,137

A reconciliation of fair value measurements in Level (c) (ii) is set out below:

At 31 December 2015

	Equity Investments £'000
Opening balance at 1 January 2015	9,665
Purchases	2,639
Sales	(1,073)
Total gains or (losses):
- on assets sold during the year	(790)
- on assets held at 31 December 2015	2,886
Assets reclassified during the year	(889)
Closing balance at 31 December 2015	12,438

At 31 December 2014

	Level (a) £'000	Level (b) £'000	Level (c) (i) £'000	Level (c) (ii) £'000	Total £'000
Financial assets
Equity investments	622,906	-	-	5,050	627,956
Government debt securities	4,337	-	-	-	4,337
Other debt securities	-	-	-	4,615	4,615
Current assets	32,103	-	-	-	32,103
Total assets	659,346	-	-	9,665	669,011
Financial liabilities
Bank loans	25,000	-	-	-	25,000
Derivatives	-	-	13,534	-	13,534
Current liabilities (excluding bank loans)	1,560	-	-	-	1,560
Total liabilities	26,560	-	13,534	-	40,094
Total net assets	632,786	-	(13,534)	9,665	628,917

A reconciliation of fair value measurements in Level (c) (ii) is set out below:

At 31 December 2014

	Equity Investments £'000
Opening balance at 1 January 2014	9,391
Purchases	950
Total gain - on assets held at 31 December 2014	711
Assets reclassified during the year	(1,387)
Closing balance at 31 December 2014	9,665

Other risks

Other risks to the Company's model, future performance, solvency or liquidity include the following:

Regulatory risk - failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of Sections 1158 and 1159 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on capital gains. The manager, depositary and administrator provide regular reports to the audit committee on their monitoring programmes. The manager monitors investment positions and the manager and company secretary monitor the level of forecast income and expenditure to ensure the provisions of Sections 1158 and 1159 are not breached.

Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation is made to ensure that special circumstances of investment trusts are recognised.

Operational/financial/custody risk - failure of the administrator's accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The manager, administrator and company secretary each have comprehensive business continuity plans which facilitate continued operation of the business in the event of a service disruption or major disruption. The audit committee receives the administrator's report on internal controls and the reports by other key third party providers are reviewed by the manager and company secretary on behalf of the audit committee.

Discount volatility - the discount at which the Company's shares trade can widen. The board monitors the level of discount and the Company has authority to buy back its own shares.

Gearing risk - the Company may borrow money for investment purposes. If the investments fall in value, any borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings.

All borrowings require the prior approval of the board and gearing levels are discussed by the board and manager at every meeting. The majority of the Company's investments are in quoted securities.

Viability statement

The UK Corporate Governance Code and Listing Rules require that the Company should publish a longer-term statement on the viability of the Company.

The directors consider that three years is an appropriate forward looking time period. This recognises the Company's current position, the investment strategy, which includes investment in smaller companies and start-ups where a three year horizon is a meaningful period over which to judge prospects, the board's assessment of the main risks that threaten the business model and the relatively fast moving nature of the sectors in which the Company invests.

The directors confirm that, based on reviews conducted as part of the detailed internal controls and risk management processes, they have a reasonable expectation that the Company will continue to maintain its status as an investment trust, to implement its investment strategy and to operate and be able to meet its liabilities as they fall due for at least the next three financial years. Their consideration also takes into account the Company's gearing and financing arrangements and its projected income and expenditure.

There are no current plans to amend the investment strategy, which has delivered good investment performance for shareholders over many years and, the directors believe, should continue to do so. The investment strategy and its associated risks are kept under constant review by the board. Those reviews take into account the possible impact on the Company's objectives of any new investment decisions made by the investment manager.

By definition, investment in smaller and start-up companies carries higher risks, both in terms of stock liquidity and longer-term business viability and this risk is accepted by the board. In addition, it should be noted that under the Company's articles of association, shareholders are required to vote triennially on whether the Company should continue as an investment trust, so the longer-term viability statement is contingent upon shareholders voting to support any continuation vote falling within the relevant three year period. The directors strongly support the Company's continuation. They continue to recommend that shareholders should vote in favour of continuation and believe that they will do so.

Directors' responsibility statement pursuant to DTR4

The directors confirm that to the best of their knowledge:

· The financial statements have been prepared in accordance with United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 102 'The Financial Reporting Standard applicable to the UK and Republic of Ireland' and give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company; and

· The management report 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.

Copies of the Company's annual report and financial statements will be available from the Company's registered office or at www.heralduk.com once published on 11 March 2016.

By order of the board

Law Debenture Corporate Services Limited

Secretary

17 February 2016

This information is provided by RNS

The company news service from the London Stock Exchange

END

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