Annual Report and Accounts

RNS Number : 7469O

Herald Investment Trust PLC

12 March 2009

 

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Regulatory Announcement

 

HERALD INVESTMENT TRUST plc

 

ANNUAL REPORT AND ACCOUNTS AND PROPOSED NEW ARTICLES OF ASSOCIATION

Copies of the Annual Report and Accounts for the year ended 31 December 2008 and the proposed new articles of association of the Company have been submitted to the UK Listing Authority and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility, which is situated at:

Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS

Tel: [phone]

The Annual Report and Accounts for the year ended 31 December 2008 is also available on the Herald Investment Trust page of the Managers website at:

www.heralduk.com

At the annual general meeting to be held on 22 April 2009, it is proposed that new articles of association be adopted in order to update the Company's existing articles of association to take account of changes in UK company law brought about by the implementation of the Companies Act 2006. A summary of the proposed changes to the existing articles of association is set out in the Appendix to the Notice of Annual General Meeting within the Annual Report and Accounts for the year ended 31 December 2008. The new articles of association are available for inspection at the offices of Herald Investment Management Limited, 10-11 Charterhouse Square, London, EC1M 6EE.

The unedited full text of those parts of the Annual Report and Accounts for the year ended 

Baillie Gifford & Co

Company Secretaries

12 March 2009

CHAIRMAN'S STATEMENT

2008 has been a tumultuous year for stock markets, and the decline in net asset value per share of 36.1% compares to a decline in the hybrid benchmark of 40.6%. Disappointing trading reports from investee companies were few and far between and insignificant overall, but the world was chasing liquidity, and the legitimate fear was that the seriousness of the credit squeeze would now affect the wider economy, and hence profits in due course. A year ago the forecast for the profitable stocks in the portfolio was 14.7x 2007 earnings: the portfolio at the end of 2008 is valued at 9.7x the earnings reported in 2007. This implies a derating of 34% on historic numbers, which nearly matches the decline in NAV, albeit on a somewhat different portfolio. A year ago the forecast p/e for 2008 was 11.6x, and is now estimated to be 9.5x; so prospective forecasts have fallen a little in aggregate, but this still represents a derating of 18%. There has at the margin been some destruction of value when companies have failed to raise new money but this has been more than offset by the opportunity to take stakes at exceptionally good valuations. Unlike bank shareholders where there has been a permanent destruction of value, the portfolio essentially remains sound, and profits continue to grow, albeit at a slower rate.

The net asset value of the Trust was weak in the second half of 2007, but January 2008 was worse than any month in 2007, and the decline in January of 10.2% exceeded the decline for 2007 as a whole. For the Trust's shareholders there was then a period of relative stability with the year to date loss reduced a little by the end of August both in absolute and relative terms. Then the crunch harshly took its bite in September, October and November with the NAV per share declining 10.2%, 18.9% and 9.5% in those months respectively. This reflected a further liquidity squeeze in the smaller companies markets around the world. Overall the NAV decline for the year was 36.1%.

The outperformance in the year against the hybrid benchmark would have been markedly greater but for the material adverse impact of a £15m marked to market provision on a 30 year interest rate swap on £50m bank borrowings. A facility of £75m was agreed in April, and £50m of this was drawn down, at a fixed margin for 3 to 5 years (c5.6%). In the spring it seemed obvious that the credit crunch was in its early stage, and that having cash in a world of distress selling would offer the potential for superior longer term returns. In light of the deteriorating macro-economic background at the year end this was invested in cash and Government bonds, in the expectation that valuations would be even more attractive in 2009. While it is exciting to have this war chest, it is a challenge to time the market bottom. Having purposefully deleveraged and repositioned the portfolio more defensively in the second half of 2007 liquid assets peaked at £40m in the first quarter, and in hindsight the Manager reinvested this cash too early, but the severity of the autumn's instability, though recognised as a possibility, seemed unlikely.

The UK still accounts for the majority of the portfolio. The weighted return of the targeted sectors was similar to the decline of the Hoare Govett Small Companies Index including AIM of 47.7% (total return). In contrast the total return of the UK portfolio was -35.8% which was usefully ahead of the index. The capital decline was £75m. The US portfolio declined 32.3% in £ terms, or £25m. The Russell 2000 Technology index was down 42.3%, or 20.1% in £ terms. Local currency returns in Europe and the Far East were -48.4% (-£3.4m) and -51.7% (-£11m) respectively. Both portfolios were reduced in the autumn of 2007 but in retrospect should have been cut even more aggressively. The volume sensitive manufacturing orientation of the Far East meant that it would always be the most vulnerable to a global recession, and it is the one area where there have been widespread reductions in profit forecasts. Had the severity of the global slowdown been anticipated clearly the weightings would have been further reduced, and the outlook for 2009 appears particularly difficult. In contrast the UK and US portfolios are reasonably defensive. As stated above the interest rate swap reflected a year end write down of £15m, albeit the 30 year gilt and swap rates have been exceptionally volatile and at the time of writing this loss has been reduced to £9m. This was partially offset by £4m unrealised bond gains at the year end. 

The income statement includes the recovery of £2.9m of VAT paid in previous years, including interest, following the judgment by the European Court of Justice, which will obviously not recur. The Board, therefore, declares a special dividend of 3.45p per share to represent the recovery of VAT and recommends a final dividend of 1.55p per share. The underlying improvement is from a loss of £1.4m to a profit of £1.8m. This significantly reflects three factors: a 29% increase in investment income, which ought to be sustainable, albeit bond income will be replaced by dividend income; a £1.2m increase in deposit interest, which is expected to decline materially; and a significant decline in the management fee reflecting the absence of VAT as well as the decline in assets. 

It is disappointing that the discount to the net asset value widened during the year to 27.2% at the year end. The Manager and the Board firmly believe that it is important to consider share buy-backs and marketing to facilitate liquidity in the shares, but that a formulaic buy-back mechanism is entirely inappropriate. The current stock market valuations on a wider basis reflect the havoc caused by there being so many distressed sellers in the market. The policy of this Company is to take material stakes in smaller companies, which are never easily acquired or realised, and in the current market conditions which remain extremely difficult it is unlikely that full liquidity could be achieved at even a 27% discount. Furthermore, the Trust has over the years participated in many primary issues and placings for emerging companies that need outside capital. It is rewarding to see how many of these have developed into successful companies from meagre beginnings, and this is a vital ingredient in the wider prosperity of the economy. It is to be hoped that a positive by-product of these troubled times will be greater recognition of the value of fundamental investing for the development of sound businesses creating long term value both for the investors in the Company, the employees in the investee companies and the wider economy. It is your Board's belief that patient investors will benefit in the long run from the ability not only to avoid being a distressed seller, but also to buy stocks at distressed valuations.  The robustness of the closed end structure is especially desirable in current market conditions.

The fragility of the banking system, and the associated contraction of credit is a worry to everyone. There are bound to be adverse repercussions in the profitability of companies within the portfolio. Nevertheless, whilst the Manager is fearful of the knock-on effects of the bleak macro environment, this is offset by excitement that the Trust is in a strong position to exploit the break down in liquidity and funding in the smaller company world, in a sector which has a number of resilient characteristics including strong balance sheets.        

Martin Boase

Chairman

6 March 2009

INVESTMENT MANAGER'S REPORT

It is disappointing to report a 36.1% decline in NAV for 2008. In the context of a decline in NAV of this magnitude a small measure of outperformance is small consolation for shareholders. With hindsight I should have positioned the portfolio more defensively than I did. 

The excess leverage in the housing and general property market was there for all to see, but the technology sector is not interest rate sensitive. On average the portfolio companies have net cash. Indeed on the basis of the last published accounts the Trust's share of underlying net cash and debt is £16-17m cash. Technology has become mission critical for most enterprises, and our policy was to minimise exposure to discretionary corporate or consumer expenditure, including consumer advertising, and to focus on recurring revenue expenditure, and on companies that would benefit from the inevitable decline in sterling. So whilst I was aware of the problems close to home including the gross excesses in parts of the City, and the UK property world, I had anticipated greater resilience in other parts of the world. There were no housing bubbles in France and Germany. Australia, Canada, Russia and the Middle East were so resource strong, while emerging economies such as China and India were discovering consumption. They would keep the US technology sector going with their demands, and the UK local difficulty seemed less threatening. What I had misjudged, or failed to understand, was that economies were so fragile elsewhere in the world. The property bubbles in Spain and Ireland were so much worse than ours, much of Russian growth and demand was based on excess leverage too, the German and French banks have mysteriously large gross balance sheets, and frighteningly small net balance sheets. It transpires that much of the emerging market growth has been built on leverage too. I also realise that while I was painfully aware of certain City excesses and instabilities I was unaware of others. In particular I thought that they were focused on the hedge fund world and investment banks. However I had not realised the scale of leverage in certain debt related hedge funds, or how much the clearing banks had participated in off-balance sheet arrangements through SIVs and so on. 

More evident and close to home I have been incredulous about the scale of price declines of certain shares, and the prices at which shares have changed hands in volume. At the small end I believe many transactions have taken place not because they have been investment decisions but because of liquidity requirements. Redemptions from retail mutual funds are to be expected. Unfortunately, as a consequence of a long period of stock market growth, and the decline of the corporate pension scheme, the mutual fund world has grown, which has led to an untoward level of redemptions from private investors understandably frightened by the media and the financial shocks. This has been compounded by a surprising degree of private investing through contracts for difference on margin, and perhaps most significantly I am astonished by the degree of smaller company investing from leveraged hedge funds. The deleveraging of the latter combined with redemptions has led to a further tap on the market. It is interesting to see data from the National Statistics Office showing that foreigners own 40% of UK listed shares, insurance companies 15%, other financial institutions (hedge funds) 10% and pension funds only 13%. The worry I have is that foreign owners and certain financial investors do not have the solid long term view that pension funds and insurance companies had. It is demonstrated by the fact that often Herald is the only or the major institutional shareholder on a register. Traditionally pension funds had solid positive cash flows, and cared about the health of the companies in which they were investing, because they had stakes that they knew that they could not trade, and overall they were of such a size that they prospered if the portfolios prospered. One of the tragic unintended side effects of the abolition of ACT relief for pension funds has been not only the demise of the defined benefit pension, but the wholesale switch to bond investing, leaving a high proportion of equity in low quality hands. We now realise that fiscally there is a huge incentive for pension funds who receive interest before tax, but dividends after tax, to ditch equities in favour of bonds (and private equity), but it is only in this downturn that I realise how damaging that has been for the instability of the equity market, and for the ability of companies to raise equity in troubled times. The silver lining is that if cash is available there are bargains to be had.

If the disappearance of pension and insurance companies from the small capitalisation registers is one trend, unfortunately the other stable source of small company investors has been investment trusts, which are the ideal vehicles for small capitalisation long term investing, but they have been under siege too. One side effect is that worthwhile liquidity is only generally attained by corporate take-overs. In the last eighteen months the Company has received bids which have completed of £90m realising a total profit from these investments over history of £65m. Take-overs in 2008 included the completion of the Northgate Information deal, which was announced in December 2007, and was the largest holding at the end of 2007. British Aerospace announced a bid in July for Detica, the largest holding in the fund at that time. Icos Vision, then our largest European holding, was acquired by KLA Tencor, and there were many smaller takeovers. Whilst the valuation of some of these exits has been disappointing, the liquidity has been useful in the current environment.

Unfortunately the performance of our holdings was overshadowed by general economic developments. The table below shows unprecedently low p/es. The weakening economy suggests that there will be downgrades for 2009 for many companies, but the weakness of sterling will provide a material tailwind to profits from overseas subsidiaries and margins on exports. The data below is incomplete data and distorted by the vagaries of accounting, but provides a useful flavour. Since IFRS was introduced most companies produce a headline number as well as a GAAP number. The table below uses Bloomberg's adjusted figure. The trouble with GAAP is that it profoundly diverges from cash flow which, particularly in uncertain times, is ultimately the characteristic we seek. The numbers in the TMT orbit that are generally suspect are the inconsistent approach to capitalisation of R&D, share based payments which are non-cash, and amortisation of intangibles but not goodwill. Crudely, good companies try to maximise tax allowable amortisation, and minimise tax, whilst bad companies try to maximise reported profits.

Market value as % of total equities	UK	US	Europe	Far East	Total
Companies profitable in 2007 and 2008 (as % of Total Market Value)	49.1%	23.0%	3.1%	5.4%	80.6%
Companies unprofitable in 2007 and profitable in 2008 (as % of Total Market Value)	2.3%	1.0%	0.3%	0.5%	4.1%
Companies unprofitable in 2007 and 2008 (as % of Total Market Value)	3.3%	0.9%	–	–	4.2%
Companies profitable in 2007 and unprofitable in 2008 (as % of Total Market Value)	0.2%	0.2%	0.1%	0.4%	0.9%
Missing data	5.5%	3.9%	0.1%	0.7%	10.2%
Total	60.4%	29.0%	3.6%	7.0%	100.0%
Earnings growth %
2008: Companies always profitable (2007 and 2008)	9.8%	8.7%	10.6%	(10.0%)	7.7%
2009: Companies always profitable (2007 and 2008)	11.8%	5.1%	15.2%	4.9%	10.2%
2009: Companies unprofitable in 2007 and profitable in 2008	57.5%	19.7%	252.6%	(13.5%)	30.5%
Earnings growth %
Total portfolio 2008*	34.4%	21.1%	13.0%	(32.8%)	22.5%
Total portfolio 2009*	26.3%	12.0%	21.7%	80.4%	27.2%
P/E profitable stocks with estimates only
2007	8.7x	15.8x	11.0x	6.4x	9.7x
2008	8.2x	15.0x	10.0x	8.6x	9.5x
2009	7.3x	14.2x	8.8x	7.7x	8.6x
P/E of all stocks with estimates only
2007	21.0x	24.7x	12.6x	7.5x	18.8x
2008	9.8x	17.7x	10.7x	11.5x	11.4x
2009	7.5x	15.8x	8.8x	6.4x	8.7x

*The calculation for 2008 and 2009 earnings growth is based only on companies with data available in each of the respective years. 

Source: JCF Group and brokers estimates

There are a number of positive side effects to the macro scene described above. Whilst the absence of likeminded investors is a frustration and has adversely affected valuations, it is also a source of opportunity and excitement. It would be dispiriting if we had no resources to buy assets, or to support companies in need of cash because we have none. In the last year several portfolio companies have gone into liquidation. Two or three went under because we chose to cut our losses, one because we had inadequate resources to support the business single handedly, and one because some of the Directors wiped out the debt by putting the business into administration and buying back on a pre-pack arrangement. This is an extremely worrying hazard, and the evaporation of the pension funds to help police such events is regrettable. On the other side of the coin a couple of small rescue funding investments at distressed levels provided near instant gratification with corporate take-over bids at useful premiums shortly thereafter. Others we have rewardingly been able to support include a company which lost its overdraft facility when its Icelandic bank went into administration. 

The key to exploiting these opportunities is to have cash. A borrowing facility was completed in April giving £25m for 2 years, which is undrawn at 0.6% over LIBOR, £25m for 3 years at 0.65% over LIBOR and £25m for 5 years at 0.7% over LIBOR. A 30 year interest rate swap was also entered into at 4.9% including margin, fixing the rate. In the short term the swap has proved superficially expensive. It is valued daily at the rate it would cost to close the swap which spiked up to £15m at the year-end. Since the year-end long rates have risen somewhat and the paper loss has declined to c£9m. Longer term it seems that the Government has no option but to expand the money supply. This combined with sterling's weakness, and the excess borrowing by Governments all over the world provides a reasonable expectation that long rates will rise. With borrowing costs at 5.6%, and p/es of c7x the mathematics is appealing, but stock selection will be key.

UK

Historically the UK stock market has always provided more liquidity even in small companies than Continental and Emerging markets. While European markets have certainly proved as difficult as would have been expected, the UK has for reasons described above proved worse than I have known in my City career. The prospective p/e of 7.5x is astonishingly low because within the average some companies are in an early stage of profitability and growth, and still have quite high multiples. For the average to be as low as 7.5x dictates that a number of companies are on p/es of 3-4x. The issue is how resilient will profits prove. There is a case for saying that the arbitrageurs in the bond market drove down the price to reduce risk premium to an absurd level, which has now dramatically reversed. In many ways in the equity market, such a sustained period of economic growth has led to an evaporation of safety premiums for resilient companies. The focus for the Trust has been on businesses with a high recurring element of subscription, maintenance, and monthly fee type businesses, which should be durable.

The performance has benefited from the Detica takeover which accounted for 8% of the UK portfolio at the bid price. This gave a profit of £7.9m during the year, and a £15.6m profit throughout the period of ownership. Ironically it performed particularly poorly in the fourth quarter of 2007, so there was an element of rebound in this. Telecom Plus performed well with several profit upgrades leading to a £3.5m increase in value during the year. Elsewhere holdings that increased in value during the year included SSP, IBS OPENSystems, Mediasurface, Northgate Information Solutions, Conchango, Axon and Xpertise which were all subject to takeover bids. 

In contrast Imagination Technologies proved the most expensive with a decline in value of £7.8m.   Ironically Apple Inc announced that they had taken a stake in December, and two days later Intel increased its stake, which is a consoling endorsement of our steadfast support. It is sad that a company with such an outstanding client list commands so little respect in the UK media and financial community. The technology which has been so impressive is the semiconductor IP which is designed in by the top semiconductor companies, which uses multi-threading technology for use in power efficient mobile graphics. In particular it is designed into the iPhone and to the Nokia N95 on a royalty basis. It has also been the technology enabler for digital radio, with a market share of c90% for semiconductors in these products, and it manufactures radios under its own Pure brand. The stock market marks it down when the broadcasters make negative comments about the poor returns the broadcasters make on the digital platform. Meanwhile the retailers placed diffident orders for Christmas, and appear to have generally run out of stock. Phoenix IT declined by £3.4m. The company had a major 5 year contract for disaster recovery with Lehman brothers and the share price collapsed when Lehman's went into administration before the first year was complete. There was no commensurate bounce when Nomura announced that they had renewed, and profits delivery has been fine. A further seven investments declined by £2-3m and 17 declined by £1-2m demonstrating how widespread the derating has been. Holdings of note where there has been disappointing trading are Arc International, Interactive Prospect Targeting, TMN, Invu, Local Radio Company, Plasmon and Xaar which collectively accounted for an £11m decline, which is relatively small in relation to the overall £75m decline. At the year end SDL was the largest holding in the fund, and in spite of a succession of profits upgrades during the year the holding still declined by £1.8m. 

US

The benchmark targets a third of the portfolio in the US, but an underweight position has consistently been run. Astonishingly the Russell 2000 Technology Index was 80 in January 1985, and reached 82.8 at the end of 2008. Furthermore it was 130 at the end of August, so was viciously hit . The underweight view reflected valuations that persistently exceeded those in the UK. The growing UK clouds and more reasonable valuations than I had ever seen prompted additional investment in May. Although this meant assets were acquired on an exchange rate in excess of $1.90, there has been a sharp decline in valuations, which are still not as cheap as the UK, but there is much greater intelligent interest in the sector, and robust balance sheets have enabled material share repurchases to facilitate the distress sellers. In spite of this, the unwinding of the hedge funds has taken a heavy toll on share prices. 

Several holdings in the US have grown into the top 20. Websense acquired a UK company in which Herald was a very early shareholder, and held at takeover. Websense has beaten brokers expectations every quarter since, and has a recurring subscription model for providing companies' control over employee internet access. It still fell 21% in $ terms over the year. Actel designs and manufactures FPGAs with a particular focus on flash. It has a huge cash balance, and targets doubling sales over 3-4 years organically. Epiq is a long standing holding which specialises in software and services for Chapter 11 and Chapters 7 and 13, and ought to offer a growth market. Advent has also been a long standing holding, which was increased following a satisfactory visit in May. Again it is a rental model for fund management software. The evaporation of the hedge fund industry and the closure of so many funds was not anticipated, so the shares halved. The drag on the portfolio was from investments in companies which unlike the UK portfolio, have genuinely disappointed including Silicon Motion Technology and Anadigics. Losses on 13 holdings exceeded $2m. There now appears to be sound value.

Europe

The European portfolio has shrunk to a mere £7m. This reflected halving big long standing positions in Logitech and United Internet in December 2007 and the take-overs of Icos Vision, Sez, Horizon and Trolltech. The remaining holdings declined so much that the overall return was -48% in local currency alleviated by currency to give a £ return of -30%, but only £3.3m in value. It is difficult to see how the companies in the technology sector can cope with the strength of the Euro, and the media sector is unappealing in a recessionary world. Furthermore the particularly troubled economies such as Ireland and Spain do not easily have currency devaluation as an option to release the pressures. I find it hard to work out how the stresses will not grow to breaking point, but the UK will be the beneficiary of some of the pressures. 

Far East

The Far East has been too exposed to manufacturing companies, and had the weakness in the global economy been anticipated the holdings would have been further reduced. The holdings are concentrated in Korea and Taiwan. The Korean Won has been as weak as sterling so there has been no currency cushion. However, the decline of almost 50% versus the Japanese Yen will be enormously helpful for the price sensitive products produced by Samsung and LG. The portfolio has shrunk to £15m and holds relatively little appeal in the current macro environment, but will be important as the global economy stabilises.

Conclusion

The macro environment remains uncertain. The degree of inter-related leverage will make this recession global without precedence. Furthermore, the UK has a particularly troubled and important financial sector. However, while the macro environment is overwhelmingly depressing, companies continue to deliver. There is a disconnection between the pessimism in the financial world, and companies who carry on trading well, with exceptionally low valuations. This, together with low interest rates, provides grounds for optimism.

PERFORMANCE ATTRIBUTION (in sterling terms)
	Benchmark allocation		Herald asset allocation		Performance*			Contribution to relative	Contribution attributable to: Stock                 Asset
Equity markets	01.01.08 %	31.12.08 %	01.01.08 %	31.12.08 %		Herald %	Benchmark %	return %	selection %	allocation† %
UK	66.7	66.7	62.4	60.3	(35.8)		(47.7)	14.2	13.8	0.4
Europe ex. UK	–	–	5.0	3.2	(30.4)		–	0.6	–	0.6
Americas	33.3	33.3	17.5	29.5	(32.3)		(20.1)	(6.1)	(4.1)	(2.0)
Asia Pacific ex. Japan	–	–	7.8	7.1	(41.0)		–	(0.3)	–	(0.3)
Emerging Markets	–	–	–	0.4	(58.1)		–	(0.1)	–	(0.1)
Bonds	–	–	3.7	15.5	21.1		–	5.8	–	5.8
Cash	–	–	3.6	15.0	6.0		–	7.2	–	7.2
Swap	–	–	–	(7.2)	N/A		–	(6.7)	–	(6.7)
Loans	–	–	–	(23.8)	4.0		–	(8.1)	–	(8.1)
Total	100.0	100.0	100.0	100.0	(36.6)		(39.3)	4.5	9.1	(4.1)

Past performance is not a guide to future performance. 

Source: HSBC. 

*The above returns are calculated on a total return basis with net income reinvested. Dividends and interest are reinvested on a cash basis, unlike the NAV calculation where income is recognised on an accruals basis. Relative performance may differ as a result. 

Contributions cannot be added together, as they are geometric; for example, to calculate how a return of (36.6%) against a benchmark return of (39.3%) translates into a relative return of 4.5%, divide the portfolio return of 63.4 by the benchmark return of 60.7 and subtract one. 

†Asset allocation includes the contribution attributable to currency movements. 

Katie Potts

6 March 2009 

DISTRIBUTION OF ASSETS

			At 31 December 2008 %		At 31 December 2007 %
Equities:	United Kingdom		45.9		62.3
	Continental Europe		2.5		5.0
	Americas		22.4		17.5
	Asia Pacific		5.4		7.8
	Emerging Markets		0.3		-
Total equities			76.5		92.6
Sterling denominated bonds			5.4		-
Norwegian krone denominated bonds			3.6		-
EUR denominated bonds			-		2.2
US$ denominated bonds			2.7		1.5
Net current assets			11.8		3.7
Total assets (before deduction of bank loans and derivative financial instruments)			100.0		100.0

TOP TWENTY HOLDINGS at 31 December 2008

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

SDL
SDL is the leader in Global Information Management (GIM) solutions that empower organisations to accelerate the delivery of high-quality multilingual content to global markets. Its enterprise software and services integrate with existing business systems to manage the delivery of global information from authoring to publication and throughout the distributed translation supply chain. Global industry leaders that rely on SDL include: ABN-Amro, Best Western, Bosch, Canon, Chrysler, CNH, Hewlett-Packard, Microsoft, Philips, SAP, Sony, SUN Microsystems and Virgin Atlantic. SDL has implemented more than 480 enterprise GIM solutions, deployed over 150,000 software licenses and provides access to on-demand translation portals for 10 million customers per month. Over 1,000 service professionals deliver consulting, implementation and language services through its global infrastructure of more than 50 offices in 30 countries.	Country     United Kingdom % of total assets     3.4 % of issued share capital held    5.6     31/12/08    31/12/07 Valuation (£m)    9.49    11.53 Shares (m)     4.23       4.22
Imagination Technologies Group
Imagination creates market-leading embedded graphics, video and display acceleration, multi-threaded processing and multi-standard receiver technology and licenses this IP (Intellectual Property) to global semiconductor and system companies. These technologies are used in the following markets: digital radio and audio, mobile phone multimedia, personal media player, car navigation and driver information, personal navigation, mobile internet device (MID), digital TV and set-top box, and mobile TV. 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 the number one supplier of radios in the UK. The group has a highly skilled workforce of over 450 people, of which over 80% are R&D engineers.	Country     United Kingdom % of total assets     3.4 % of issued share capital held    6.6     31/12/08    31/12/07 Valuation (£m)    9.29    15.40 Shares (m) 14.98  12.52

Telecom Plus
Telecom Plus supplies fixed wire and mobile telecommunications services, gas, and electricity to residential and small business customers in the United Kingdom. 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 from a network of Independent Distributors. An advanced billing system means the customer receives a single monthly bill covering all the services provided.	Country     United Kingdom % of total assets     2.9 % of issued share capital held    4.0     31/12/08    31/12/07 Valuation (£m)    8.08    5.25 Shares (m)      2.64       2.84
Phoenix IT Group
Established in 1980, the Group provides a growing range of complementary IT infrastructure support services including systems management, communications, remote telephone support, high-touch field services, project and consultancy services and business continuity and disaster recovery services. Often these services are sold and delivered as a managed service where Phoenix manages complex IT infrastructures to agreed levels of service under long term contracts. In May 2007 Phoenix acquired ICM for £130m in cash and shares, ICM had been a portfolio holding since 2002.	Country     United Kingdom % of total assets     1.8 % of issued share capital held    3.9     31/12/08    31/12/07 Valuation (£m)    4.97    5.37 Shares (m)      2.95       1.73
Websense
Websense is the global leader in integrated web, data and e-mail security, providing essential information protection for more than 42 million employees at more than 50,000 organisations worldwide. Headquartered in San Diego, California, Websense distributes its solutions through a global network of channel partners. Websense software and hosted security solutions help organisations block malicious code, prevent the loss of confidential information, and enforce internet use and security policies. Websense has its roots in web filtering and continues to develop its core strength in discovering and classifying content across all its product offerings. In March 2007 Websense acquired SurfControl for $400m in cash, SurfControl had been a portfolio holding since 1998.	Country     America  % of total assets     1.7     31/12/08    31/12/07 Valuation (£m)    4.82    1.83 Shares (m)      0.47       0.22
Diploma
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     1.5 % of issued share capital held    3.1     31/12/08    31/12/07 Valuation (£m)    4.21    7.09 Shares (m)    3.45       0.76
SQS Software Quality Systems
Founded in Cologne, Germany, in 1982, SQS Group (SQS) is the largest independent provider of software testing and quality management services in the world. The company tests web, e-commerce, infrastructure, security and client server applications. With more than 4,800 successfully completed projects under its belt, SQS has a strong customer base, including half of the DAX 30 companies, almost one third of the STOXX 50 companies and 36 FTSE 100 companies. SQS has around 1,400 employees worldwide. The clients include Barclays, BP, Credit Suisse, Daimler, Deutsche Bank, Deutsche Post, Dresdner Bank, MessageLabs, Phoenics, T-Mobile, T-Systems, and Zurich Group.	Country     United Kingdom % of total assets     1.5 % of issued share capital held    7.4     31/12/08    31/12/07 Valuation (£m)    4.17    3.74 Shares (m)      1.94       1.34

Group NBT
Group NBT is a leading provider of domain names and internet-related services. Established in 1995, the company has registered hundreds of thousands of domain names and hosts tens of thousands of websites. Group NBT's clients come from many industries and include well-known companies such as British Airways, The New Statesman and Centrica. Group NBT currently has over 250 employees worldwide, with offices in London, Copenhagen, New York, Nice, Munich, Zurich, Oslo and Madrid. With five market-leading brands, Group NBT is now made up of the following companies: NetBenefit, providing high quality managed hosting services in both the UK and continental Europe; NetNames, providing registration services for every top level domain available and providing corporate domain name management to large organisations through its industry leading NetNames Platinum Service, which is now used by over 30% of the FTSE 100; Easily.co.uk, a top UK provider of cost effective web hosting and domain name services to UK businesses and consumers; Speednames, the dominant provider of domain name services in Denmark; Ascio, which is responsible for the provision of domain name services indirectly through more than 300 partnerships including telecom operators, web hosting companies, internet access providers and IP law firms; and Envisional, whose services monitor the Internet for brand abuse, fraud, counterfeiting and piracy.	Country     United Kingdom  % of total assets     1.4 % of issued share capital held    8.0     31/12/08    31/12/07 Valuation (£m)    3.97    3.57 Shares (m)      2.03       1.78
Electrocomponents
Electrocomponents is the leading high service distributor of electrical, electronic and industrial supplies. Starting in 1937 in London selling spare parts for radios the Group now has operations in 26 countries covering 82% of the world's GDP, with distributors in many more. Turnover is around £900m, of which 59% comes from the international business and one third of sales are via e-commerce. Electrocomponents trades as RS in the UK, most of Europe and Asia, Radiospares in France, Radionics in Republic of Ireland and Allied Electronics in North America. In total Electrocomponents offers 450,000 products which are sold to 1.6 million customers.	Country     United Kingdom  % of total assets     1.3     31/12/08    31/12/07 Valuation (£m)    3.70    - Shares (m)      2.66       -
Actel
Actel is attacking power consumption at both the semi-conductor and the system levels with its innovative low-power and mixed-signal FPGA solutions. As the leading non-volatile FPGA supplier, Actel leverages its silicon, tools, power-smart IP, and packaging technologies to offer comprehensive solutions that provide chip designers with low power, small footprint, maximum security and reliability. From portable and automotive systems to medical instrumentation, satellite orbit control, networking line cards, and telecom switches and routers, Actel broadly impacts a range of global electronics products with a range of innovative ultra-low power programmable solutions.	Country     America  % of total assets     1.3     31/12/08    31/12/07 Valuation (£m)    3.61    2.00 Shares (m)      0.44       0.29
Epiq Systems
Epiq Systems is a leading provider of integrated technology products and services for the legal profession. Epiq's software applications and Web-based platforms offer case management and document management solutions for electronic disclosure. Epiq's solutions streamline the administration of bankruptcy, litigation, financial transactions and regulatory compliance matters. Technology solutions cover electronic discovery, document review, legal notification, claims administration and controlled disbursement. Clients include leading law firms, corporate legal departments, bankruptcy trustees and other professional advisors for support of administratively complex matters spanning litigation and regulatory compliance. Epiq has a relationship with over 1,000 law firms including 47 of the 50 largest global firms.	Country     America  % of total assets     1.3     31/12/08    31/12/07 Valuation (£m)    3.48    2.62 Shares (m)      0.30       0.30

Wilmington Group
Wilmington is one of the UK's leading providers of information and training for professional business markets. The Group provides training, arranges industry events and publishes magazines, directories, databases and special reports focused primarily on its principal sectors of Legal and Regulatory, Healthcare, Media and Entertainment and Design and Construction.	Country     United Kingdom  % of total assets     1.2     31/12/08    31/12/07 Valuation (£m)    3.32    5.26 Shares (m)      2.48       2.53
Alternative Networks
Alternative Networks is a UK business communications service provider. The Group offers a full range of fixed line, mobile, voice and data products. Launched in 1994, Alternative Networks has achieved a track record of consistently profitable growth and in February 2005 listed on the Alternative Investment Market. Alternative Networks is a reseller for providers such as BT, O2 and Vodafone and equipment vendors like Avaya and Mitel. The Group caters to a broad range of telecoms needs, including both stand alone products and fully converged solutions, for larger SMEs and smaller corporate customers in the UK. It has over 4,500 business customers which include clients such as JC Decaux, Channel 4, Miele and Securitas. The Group has grown rapidly, now employing over 430 people, across four UK sites.	Country     United Kingdom  % of total assets     1.1 % of issued share capital held    4.6     31/12/08    31/12/07 Valuation (£m)    3.17    3.27 Shares (m)     2.05       2.05
Wind River Systems
Wind River Systems is a global leader in device software optimisation (DSO). Wind River enables companies to develop, run, and manage device software better, faster and at lower cost. Wind River technology is currently deployed in more than 300 million devices worldwide by industry leaders like Apple, Hewlett-Packard, Boeing, Motorola, NASA, and Mitsubishi. Wind River Professional Services enable leading electronics vendors like Philips, Siemens, Nortel and Samsung to design, develop and deploy innovative products on or ahead of schedule, at or below budget. Founded in 1981, Wind River is a publicly held company headquartered in Alameda, California, with operations worldwide.	Country     America % of total assets     1.1     31/12/08    31/12/07 Valuation (£m)    3.14    - Shares (m)      0.50       -
Advent Software
Advent Software offers integrated software, products and services for automating and integrating data and work flows across the investment management organisation, as well as between the investment management organisation and external parties. Advent's products increase operational efficiency, improve the accuracy of client information and reporting, and enable better decision making. Each solution focuses on specific mission-critical functions of the front, middle and back offices and is designed to meet the needs of the particular client, as determined by size, assets under management and complexity of the investment environment. With more than 4,500 client firms, Advent has established itself as a leading provider of mission-critical applications to meet the demands of investment management operations around the world.	Country     America % of total assets     1.0     31/12/08    31/12/07 Valuation (£m)    2.78    2.71 Shares (m)      0.20       0.10
M&C Saatchi
M&C Saatchi was launched in 1995, with the aim of becoming the world's most sought after advertising agency. The company is now the world's largest independent network, with headquarters in London and regional centres covering America, Asia Pacific and Europe. M&C Saatchi employs over 1,000 people and works for more than 200 clients.	Country     United Kingdom % of total assets     1.0 % of issued share capital held    5.6     31/12/08    31/12/07 Valuation (£m)    2.62    3.91 Shares (m)      3.40       3.15

StatPro Group
StatPro is a leading provider of portfolio analytics and data solutions for the global asset management industry. Having grown from a one product company, StatPro now offers clients eight core products including data and enterprise reporting solutions. This range of products enables StatPro to provide a unique integrated product offering. Over the past 14 years, StatPro has developed its products in close collaboration with international asset managers and can offer data and software solutions for risk management, fixed income analysis, performance measurement, attribution analysis, GIPS compliance and reporting. StatPro has around 400 client contracts in 25 countries with 11 offices worldwide. StatPro has grown its recurring revenue from less than £1m in 1999 to £22m in 2007 (94% renewal rate in 2007).	Country     United Kingdom % of total assets     0.9 % of issued share capital held    12.8    31/12/08       31/12/07 Valuation (£m)    2.58    4.40 Shares (m)    6.98    5.18
Alterian
Alterian empowers marketers with an integrated marketing software platform combining database, online and operational marketing applications on a shared data infrastructure. The Alterian Integrated Marketing Platform makes it practical and cost effective for marketers to execute an integrated marketing strategy across online and offline channels. It is the integration of analytics, content and execution through Alterian's industry leading tools, which enables marketers to drive a seamless, multi-channel customer experience. Alterian's analytically led software is delivered to approximately 1,000 marketing departments, across 26 countries, via an international network of more than 100 business partners, including marketing services providers, agencies and systems integrators. Customers include market leaders such as Princess Cruises, General Motors, Zurich, Astra Zeneca, HSBC, Dell and Vodafone. In July 2008 Alterian acquired Mediasurface, a web content management business for £18m in cash and shares, Mediasurface had been a portfolio holding since 2006.	Country     United Kingdom  % of total assets     0.9 % of issued share capital held    7.5        31/12/08       31/12/07 Valuation (£m)    2.46    3.85 Shares (m)     4.31    3.35
Euromoney Institutional Investor
Euromoney is a leading international business-to-business media group focused primarily on the international finance, metals and commodities sectors. It publishes more than 70 magazines, newsletters and journals, including Euromoney, Institutional Investor and Metal Bulletin. It also runs an extensive portfolio of conferences, seminars and training courses and is a leading provider of electronic information and data covering international finance, metals and emerging markets. Its main offices are in London, New York and Hong Kong and more than a third of its revenues are derived from emerging markets.	Country     United Kingdom % of total assets     0.9       31/12/08     31/12/07 Valuation (£m)    2.42    3.74 Shares (m)    1.10    1.00
IDOX
IDOX is a specialist information and knowledge management business with its origins in supplying the UK local authority sector. IDOX focuses on the development and delivery of software products and content for information and knowledge sharing, recruitment and training of information professionals at all levels and consultancy services. The software division provides local authorities with software which delivers seamless integration and automation, from user interfaces through to document storage. The managed services division offers a range of managed services including Unity and UKPlanning. The information services division offers a combination of a comprehensive information service with fully developed web based document management solutions. TFPL provide services in consultancy, recruitment and training.	Country     United Kingdom % of total assets     0.9 % of issued share capital held    8.4       31/12/08       31/12/07 Valuation (£m)    2.39    2.92 Shares (m)    28.97    25.97

Note: A figure is presented for % issued share capital held only if greater than 3%.

PRINCIPAL RISKS AND UNCERTAINTIES

The Company's assets consist mainly of listed securities and its principal risks are therefore market related and include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk.

Further information on these risks and how they are managed is contained in the Annual Report.

Other risks faced by the Company include the following:

Regulatory risk - failure to comply with the 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 section 842 of the Income and Corporation Taxes Act 1988 could lead to the Company being subject to tax on capital gains. Baillie Gifford's Heads of Business Risk & Internal Audit and Regulatory Risk provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes. The Managers monitor investment movements and the Secretary monitors the level of forecast income and expenditure to ensure the provisions of section 842 are not breached.

Operational/financial Risk - failure of the Secretary'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 Audit Committee reviews the Secretary's Report on Internal Controls and the reports by other key third party providers are reviewed by the Secretary on behalf of the Audit Committee.

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RELATION TO THE FINANCIAL STATEMENTS

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

Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company as at the end of the year and of the net return for the year.  

In preparing the financial statements, the Directors are required to: 

• select suitable accounting policies and then apply them consistently; 

• make judgements and estimates that are reasonable and prudent; 

• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and 

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. 

The Directors confirm that they have complied with the above requirements in preparing the financial statements.

The Directors are responsible for ensuring that proper accounting records are kept which disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 

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

We confirm that to the best of our knowledge:

• the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

• the Annual Report includes a fair view 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 the Company faces.

By order of the Board 
Douglas McDougall
6 March 2009

INCOME STATEMENT

	For the year ended 31 December 2008				For the year ended 31 December 2007
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Losses on investments	-	(126,592)	(126,592)		-	(32,898)	(32,898)
Currency gains/(losses)	-	54	54		-	(49)	(49)
Income (note 3)	7,629	-	7,629		5,167	-	5,167
Investment management fee	(2,808)	-	(2,808)		(4,252)	-	(4,252)
Recovered VAT (note 4)	2,506	-	2,506		-	-	-
Other administrative expenses	(321)	-	(321)		(268)	-	(268)
Net return before finance costs and taxation	7,006	(126,538)	(119,532)		647	(32,947)	(32,300)
Finance costs of borrowings	(2,128)	-	(2,128)		(1,883)	-	(1,883)
Net return on ordinary activities before taxation	4,878	(126,538)	(121,660)		(1,236)	(32,947)	(34,183)
Tax on ordinary activities	(136)	-	(136)		(134)	-	(134)
Net return on ordinary activities after taxation	4,742	(126,538)	(121,796)		(1,370)	(32,947)	(34,317)
Net return per Ordinary share (note 5)	5.59p	(149.07p)	(143.48p)		(1.57p)	(37.82p)	(39.39p)
Dividend per Ordinary share (note 6)	1.55p				0.50p
Special dividend per Ordinary share (note 6)	3.45p

  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.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.

BALANCE SHEET

		At 31 December 2008		At 31 December 2007
		£'000		£'000
FIXED ASSETS Investments held at fair value through profit or loss		243,276		330,833
CURRENT ASSETS
Debtors		1,803		839
Cash and short term deposits		31,547		12,155
		33,350		12,994
CREDITORS: Amounts falling due within one year (note 7)		(50,837)		(330)
Derivative financial instrument (note 7)		(15,079)		-
		(65,916)		(330)
Net current (liabilities)/assets		(32,566)		12,664
TOTAL NET ASSETS		210,710		343,497
CAPITAL AND RESERVES
Called-up share capital		20,852		21,743
Share premium		73,738		73,738
Capital redemption reserve		1,100		209
Capital reserve		109,072		246,171
Revenue reserve		5,948		1,636
EQUITY SHAREHOLDERS' FUNDS		210,710		343,497
Net asset value per Ordinary share		252.63p		394.96p
Ordinary shares in issue (note 8)		83,408,123		86,971,010

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS 

For the year ended 31 December 2008 

	Called-up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital Reserve Realised Unrealised      £'000  £'000		Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at  1 January 2008	21,743	73,738	209	247,789	(1,618)	1,636	343,497
Net return on ordinary activities after taxation	-	-	-	10,634	(122,093)	4,742	(106,717)
Shares bought back	(891)	-	891	(10,561)	-	-	(10,561)
Revaluation of interest rate swap	-	-	-	-	(15,079)	-	(15,079)
Dividends paid during the year	-	-	ߛ	-	-	(430)	(430)
Shareholders' funds at  31 December 2008	20,852	73,738	1,100	247,862	(138,790)	5,948	210,710

For the year ended 31 December 2007

	Called-up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital Reserve  Realised Unrealised     £'000 £'000		Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at  1 January 2007	21,889	73,738	63	233,361	48,125	4,052	381,228
Net return on ordinary activities after taxation	-	-	-	16,796	(49,743)	(1,370)	(34,317)
Shares bought back	(146)	-	146	(2,368)	-	-	(2,368)
Dividends paid during the year	-	-	ߛ	-	-	(1,046)	(1,046)
Shareholders' funds at  31 December 2007	21,743	73,738	209	247,789	(1,618)	1,636	343,497

The Institute of Chartered Accountants in England and Wales, in its technical guidance TECH 01/08, states that profits arising out of a change in fair value of assets, recognised in accordance with Accounting Standards, can be treated as realised, provided the change recognised can be readily converted into cash. Securities listed on a recognised stock exchange are generally regarded as being readily convertible into cash and hence unrealised profits in respect of such securities, currently included within the Unrealised Capital Reserve, can be regarded as distributable under Company Law. 

SUMMARISED CASH FLOW STATEMENT
	For the year ended 31 December 2008			For the year ended 31 December 2007
	£'000	£'000			£'000	£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES		6,092				187
NET CASH OUTFLOW FROM SERVICING OF FINANCE		(1,614)				(2,156)
FINANCIAL INVESTMENT
Purchase of investments	(100,426)				(82,697)
Sale of investments	76,331				108,457
NET CASH (OUTFLOW)/INFLOW FROM FINANCIAL INVESTMENT		(24,095)				25,760
EQUITY DIVIDEND PAID		(430)				(1,046)
NET CASH (OUTFLOW)/INFLOW BEFORE FINANCING		(20,047)				22,745
FINANCING
Shares repurchased	(10,561)				(2,368)
Loans drawn down (note 7)	50,000				60,000
Loans repaid	-				(80,000)
NET CASH INFLOW/(OUTFLOW) FROM FINANCING		39,439				(22,368)
INCREASE IN CASH		19,392				377
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET (DEBT)/FUNDS
Increase in cash in period		19,392				377
(Increase)/decrease in bank loans (note 7)		(50,000)				20,000
MOVEMENT IN NET (DEBT)/FUNDS IN PERIOD		(30,608)				20,377
NET FUNDS/(DEBT) AT 1 JANUARY		12,155				(8,222)
NET (DEBT)/FUNDS AT 31 DECEMBER		(18,453)				12,155
RECONCILIATION OF NET RETURN BEFORE FINANCE COSTS AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
Net return on ordinary activities before finance costs and taxation		(119,532)				(32,300)
Losses on investments		126,592				32,898
Currency (gains)/losses		(54)				49
Amortisation of fixed interest book cost		148				-
Changes in debtors and creditors		(976)				(283)
Income tax (suffered)/repaid		(4)				6
Overseas tax suffered		(136)				(134)
Realised currency profit/(loss)		54				(49)
NET CASH INFLOW FROM OPERATING ACTIVITIES		6,092				187

NOTES 

1.		The financial statements for the year to 31 December 2008 have been prepared on the basis of accounting policies which are consistent with those set out in the Company's Annual Financial Statements at 31 December 2007. The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company is subject to the UK's regulatory environment.
2.		Related party transactions  The Directors' fees for the year are detailed in the Directors' Remuneration Report contained within the Annual Report. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 232 of the Companies Act 1985. Herald Investment Management Limited are appointed as investment managers under a management agreement which is terminable on twelve months' notice. Their fee is calculated on a monthly rate of 0.08333% of the Company's net asset value based on middle market prices. The management fee is levied on all assets except the holding in Herald Ventures II Limited Partnership managed by Herald Investment Management Limited.
			31 December 2008 £'000						31 December 2007 £'000
3.	Income
	Income from investments and interest receivable		7,597						5,167
	Other income		32						-
			7,629						5,167
4.	Recovered VAT In 2007 the European Court of Justice ruled that investment management fees should be exempt from VAT. Since then, HMRC has accepted the Managers' repayment claims for the periods from 2001 to 2007. £2,506,000 of VAT together with £370,000 of interest was received by the Manager on behalf of the Company in respect of this period. These amounts have been paid to the Company and recognised in the current year.
			31 December 2008 £'000					31 December 2007 £'000
5.	Net return per ordinary share
	Revenue return		4,742					(1,370)
	Capital return		(126,538)					(32,947)
	Total return		(121,796)					(34,317)
	Net return per Ordinary share is based on the above totals of revenue and capital and on 84,885,186 Ordinary shares (2007 - 87,114,983) being the weighted average number of Ordinary shares in issue during the year. There are no dilutive or potentially dilutive shares in issue.
			31 December						31 December
			2008		2007				2008 £'000		2007 £'000
6.	Dividends
	Amounts recognised as distributions in the period:
	Previous year's final (paid 1 May 2008)		0.50p		1.20p				430		1,046
	We also set out below the total dividends payable in respect of the financial year, which is the basis on which the requirements of Section 842 of the Income and Corporation Taxes Act 1988 are considered. The revenue available for distribution by way of dividend for the year is £4,742,000 (2007 - £Nil).

NOTES (Ctd)

		31 December				31 December
		2008		2007		2008 £'000		2007 £'000
6.	Dividends (continued)
	Dividends paid and proposed in the period:
	Proposed final dividend per Ordinary share	1.55p		0.50p		1,293		435
	Proposed special dividend per Ordinary share#	3.45p		-		2,877		-
		5.00p		0.50p		4,170		435
	Adjustment to provision for 2007 final dividend re shares bought back					-		(5)
						4,170		430
	The current year's proposed dividends will be paid on 30 April 2009 to all shareholders on the register at the close of business on 14 April 2009. The ex-dividend date is 8 April 2009.
	# The proposed special dividend of 3.45p represents the recovery of VAT from HMRC (see Note 4).
7.	During the year, the Company replaced its existing 364 day £50 million multi-currency loan facility with a £75 million multi-currency variable rate loan facility with The Royal Bank of Scotland plc. The new facility comprises three £25 million tranches expiring on 31 May 2010, 2011 and 2013. Arrangement fees on this facility totalling £112,500 have been written off through finance costs of borrowings. At 31 December 2008, there were outstanding drawings of £50 million (2007 - Nil). Interest on the loans is payable in quarterly instalments in January, April, July and October. A non-utilisation fee of 0.30% is payable on the £25 million undrawn. The estimated repayment value of the loan at 31 December 2008 was £50 million. The indicative costs of repaying the loan as at 31 December 2008 were not material in the context of the above figures. The interest on £50 million of this facility 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 2008 was an estimated liability of £15 million (2007 - Nil) based on the marked to market value.
8.	At the Annual General Meeting in April 2008 Shareholders granted the Company authority to purchase shares in the market up to 12,896,875 Ordinary shares (equivalent to 14.99% of its issued share capital at that date). In the year to 31 December 2008, a total of 3,562,887 (2007 - 585,000) Ordinary shares with a nominal value of £890,722 (2007 - £146,250) were bought back at a total cost of £10,561,000 (2007 - £2,368,000). At 31 December 2008 the Company had authority to buy back a further 10,268,474 Ordinary shares. Under the provisions of the Company's Articles share buy-backs are funded from the realised capital reserve. The Company does not have any externally imposed capital requirements.
9.	During the period transaction costs on purchases amounted to £546,000 (2007 - £387,000) and transaction costs on sales amounted to £189,000 (2007 - £354,000).
10	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2008. The financial information for 2007 is derived from the statutory accounts for 2007 which have been delivered to the Registrar of Companies. The Auditors have reported on the 2007 accounts, their report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for 2008 will be finalised on the basis of the financial information presented in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.
11	The Report and Accounts for the year ended 31 December 2008 will be available on the Managers' website www.heralduk.com on or around 12 March 2009.
12	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

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