Final Results

RNS Number : 3219Y

Herald Investment Trust PLC

20 February 2013

 



RNS Announcement: Preliminary Results

Herald Investment Trust plc

20 February 2013

Chairman's Statement

In 2012 the NAV total return was 12.3%. This is satisfactory in the context of returns made from the wider indices, and in particular the decision to remain heavily weighted in the UK, where smaller companies proved one of the strongest asset classes, was vindicated again. The UK portfolio delivered a total return of 18.0%, but the Numis Smaller Companies Index returned 22.5%. In contrast the US portfolio returned only 1.4% (in £) compared with the Russell 2000 Technology Index rising 4.5%. In consequence the UK portfolio has now risen to the highest proportion of the equity portfolio this century at 70.9%, while the US portfolio has fallen to 20.9%. The European portfolio recovered by 17.5% (in £), but remains a modest weighting, while the Far East delivered a total return of 10.3%, including the Taiwan portfolio which returned 19.3% (in £) and the strongest component.

The goal of the Company is to achieve real long term capital appreciation. It is worth observing that over the longer term the total returns are as follows:

Total return	1 year	3 years	5 years	10 years	Inception (February 1994)
Herald Investment Trust (including dividends distributed)	12.3%	50.8%	61.8%	210.6%	557.6%
Numis Smaller Companies Index plus AIM (total return ex. investment companies)	22.5%	40.0%	18.3%	193.5%	261.2%
Russell 2000 (small cap) Technology Index (in sterling terms)	4.5%	35.3%	53.0%	133.4%	-

The TMT sector (technology, media and telecoms) has continued to be exposed to an abnormally high degree of corporate activity, but supply and demand do appear to be more balanced. The IPO market remains virtually closed. Fourteen stocks in the portfolio were taken over with a total consideration of £26.8m, and four takeovers pending account for a further £9m. This takes the cumulative value of takeover bids to £218m over the last six years. In context that exceeds the net assets of the fund at the end of 2008. In fact this year there were some significant takeovers in the larger capitalisation TMT stocks in the UK in which had grown out of the smaller market capitalisation remit of Herald Investment Trust (HIT) i.e Logica, Misys,Cable & Wireless Worldwide and Aegis. The equity market continues the long term trend of net equity withdrawal in the UK with takeovers exceeding IPOs by number and value. In 2012 the number of fully listed companies fell 6.3% to 929, and the number of AIM listed companies fell by 4.1% to 1,096 in 2012. The shortage of capital for equity investment continues to be particularly evident in the UK than anywhere else. The sharp decline of pension funds and insurance companies as owners of UK equities has unquestionably had a profoundly damaging effect on the UK technology sector. Above all the technology sector requires equity and not bank debt. The United States has over the last thirty years been the most professional and prolific market in providing equity both at the early venture stage, and through IPOs. That is why the US technology sector is so large and successful. In respect of the UK, and indeed Europe as a whole,this is a failing of the regulatory environment, actuaries, accounting rules and the wider UK investment industry, which from the Herald perspective is damaging to both the sector and the economy. In particular the drive to minimise volatility and match assets and liabilities has driven asset allocation away from equities. 

However, at this time HIT continues to enjoy having some equity capital in a capital constrained environment, and it may well be that the sector has performed well in the UK as takeover proceeds have been recycled into other stocks in the sector. It may also be that the bulk of the asset reallocation is now behind us, and that the market will stop shrinking.

HIT has continued to support companies by participation in primary placings. Since inception it has raised £95m from shareholders (£65m in 1994 and £30m in 1996), and has subsequently bought back £31m so net outside capital has been £64m. In contrast it has participated in UK issues to £233m including £20m in 2012. The power of compounding is helpful in terms of scale, and it is fulfilling to see the Company's investment enabling job creation and positive tax payments, as well as delivering profits to HIT's shareholders.

A number of holdings delivered a return in excess of 100% in 2012 including Bango, Wandisco, Pace, IDOX, Mellanox and BSE. Takeovers in which the Company was not invested aside, the area of relative underperformance came from certain large holdings which have contributed strongly to outperformance in previous periods. In particular Imagination and SDL in the UK, and Ceva and Silicon Motion in the US fall into this camp.

The consumerisation of technology continues apace. Developed markets are moving to 4G (fourth generation mobile phone), and less developed markets are buying smarter phones with internet access. The internet continues to be both disruptive and creative. Corporate IT departments are struggling to deliver to the performance of consumer devices, and security issues become ever more frightening. Data is being generated at an unprecedented rate, and there are ever more creative applications for applying this data. Although the sector is more appealing than the wider economy, there will continue to be both winners and losers, but overall interesting opportunities continue to emerge.

2012 has been another solid year in terms of corporate profitability albeit the growth rate has slowed to high single digits on average. At this stage a similar growth rate is anticipated in aggregate market forecasts for 2013. With fiscal tightening the fashion for Governments around the world the outlook for profits growth seems challenging, but the sector has resilient attractions, and continues to be creative and disruptive which may more than offset the economic challenges in share price terms.

There is a small income surplus as in previous years after expensing all costs. This enables the Board to recommend a 1.00p dividend (2011 - 1.00p).

The Company's Articles of Association first gave shareholders the right to vote at the Annual General Meeting (AGM) on 14 April 2004 (and at AGMs to be held in every third year thereafter) as to whether the Company should continue to operate as an investment trust. Accordingly, an ordinary resolution, Resolution 10 in the Notice of Annual General Meeting, is being proposed at the AGM of the Company to be held on 23 April 2013 to the effect that the Company should continue as an investment trust.

Herald Investment Trust is one of the largest investment trusts specialising in technology, communications and multi-media and is one of the best performing investment trusts since its launch in February 1994. Furthermore it is the only specialist technology orientated investment trust with a material exposure to the United Kingdom. The Herald Board believes that the focus of the Trust on smaller capitalisation companies provides exposure to some of the most rapidly growing companies within the Trust's target sectors and should continue to provide attractive long term investment opportunities. The Directors believe that the prospects for investment in the technology and media sectors remain positive and the Company is managed by one of the most experienced and successful managers in the sector. Your Board strongly recommends that shareholders vote in favour of the resolution. The Directors intend to vote their own shareholdings in favour of the resolution for the Company to continue as an investment trust.

Julian Cazalet

Chairman

19 February 2013

Manager's Report

2012 has been a more challenging year for the global TMT sector. One of the cornerstone markets, the PC, has seen steady downward revisions, as the tablet and the economy has eroded demand for notebooks. According to IDC, volumes declined 3.2% to c350m in 2012. There are some high profile large companies that have been challenged such as Nokia and RIM which fell with the rise of the iPhone, and look-a-likes from Samsung in 2011. 2012 was the year when the iPad and its clones rocked the PC market. HP and Dell are high profile casualties, but the less visible supply chain in Asia has also had a tough time. Meanwhile a sluggish economy has reduced demand for office fit outs, and corporate IT budgets have been constrained. Against this background the UK sector has done remarkably well, and European companies have bounced after a poor year in 2011. In part this reflects the fact that Europe no longer has a manufacturing sector, and this price sensitive/volume sensitive market is now in Asia. The UK sector has been more service led and IP or design oriented. Meanwhile the smartphone market is still showing good volume growth, and internet usage growth continues unabated. Additional competition in the tablet market followed the launch of new Kindle devices from Amazon, a new Nexus product from Google, and the Surface from Microsoft. Different regions have different characteristics.

UK

The UK portfolio remains the most important within the Company, and now accounts for over 70% of the equity portfolio. The total return for Herald's UK portfolio was 18% versus the Numis Smaller Companies Index extended to include AIM returning 22.5%. Although over the long term Herald Investment Trust has dramatically outperformed the Numis Index there have been years when the UK return has lagged. This is the first year when it has lagged when the relevant sectors have outperformed the Index. The reasons for the underperformance are as follows:

1.  Poor share price performance of the two largest investments Imagination and SDL. In declining 25% and 23.5% respectively these effectively accounted for half the underperformance. Material profits have already been realised on these investments, which have been outstanding over the last decade. At the start of 2012 the Imagination holding had been reduced from over 15m shares to less than 5m, and SDL reduced somewhat less. In spite of the poor performance in 2012 these companies had a realised and unrealised profit of £62m on a maximum invested value of £8.2m.

2.  Certain large stocks that performed particularly well which were not owned by HIT and peripheral to the defined remit. Firstly Renishaw (+111%), which is a company that I knew well pre Herald as analyst at its corporate advisor. I have great respect for the way they have built the business, but have not perceived it to be in the TMT defined remit in which we invest. Secondly TalkTalk (+81%) which was previously in the retail sector.

3.  Certain stocks which we ought to have owned - Oxford Instruments and Dialight and possibly Perform. Other stocks such as Johnston Press, Trinity Mirror, Pace, CSR and Wolfson have bounced strongly. We have benefited from being underweight or not owning them in the past, but in consequence have had modest positions for the rally.

4.  The weighted return of AIM stocks in the target sector is far lower, and the portfolio is skewed to these smaller companies.

Over the long term the UK has performed well, and compounded in capital terms since 1994 at c14%. We do not have a formal benchmark, and in any one accounting period divergences are inevitable.

US

The US market performed much less well than the UK. In sterling, the Russell 2000 Technology Index rose 4.5%, and the large cap Russell 1000 index returned 7.4%.

The star performer was Mellanox, which appreciated 116% ($10.4m rise). They are market leader in Infiniband which has been adopted more widely since Intel launched the Romley server processors for high speed datacentre connections. The share price peaked at $120 in September. Abovenet, Standard Microsystems, Retalix and MIPS have all performed on takeover offers, albeit Retalix and MIPS have yet to complete.

Offsetting this Ceva and Silicon Motion have been particularly poor performers declining 48% and 28% respectively (in $), both of which had been star performers in previous years. In 2011 Silicon Motion had risen 341% (in $). In addition there were lacklustre performances from holdings such as Advent Software, Websense and Pegasystems.

The US portfolio has been derated this year, and stands at a modest 10% premium to the UK portfolio in p/e terms on 2013 numbers, which is the smallest premium in HIT's history. The US sector is strong, and the economy will benefit from cheap domestically produced energy.

Europe

The European portfolio is small, but rallied 20% in local currency or 17.5% in £.

Far East

The Far East portfolio has delivered a £ return of 10.3%. Taiwan returned 19.3%, and Korea returned 8.2%. Companies domiciled in these two countries account for the majority of the Far East portfolio. The Far East is now significant in terms of number of companies, but we have struggled to find companies with pricing power, and a structure which will respect outside shareholders. We have watched the feeding frenzy of mindless money invest as they did in TMT in the UK and US in 1999-2000, and to a lesser extent in the AIM market in 2005-2006. It seems probable that there will be some worthwhile investments as we have found post bubble in the UK. Regrettably the legal environment is much less developed than in the UK or the US. We have purposefully targeted resource in this area, which has thus far been productively deployed to keep us out of trouble.

The Addressable Market

Ultimately we invest in companies, not a concept. We have expressed our concern for a number of years about the proliferation of takeovers in the UK in particular. The numbers are stark, and it is now inevitable that the UK will fall as a percentage of the portfolio, but we have enjoyed the harvest. A screen of stocks in the technology and media sectors as defined by Bloomberg is summarised in the table below.

Number of quoted companies with market capitalisation <£1bn >£30m

Sector	UK	W Europe	N America	Asia Dev	Asia Emerging	World
Technology	64	183	353	667	283	1,635
Media	30	64	76	131	75	421
Electronic & Electrical Equipment	18	78	90	441	278	943
Total	112	325	519	1,239	636	2,999

Source:Bloomberg 31/12/2012

Prior to the financial crisis there were as many companies in the UK as the rest of Europe put together. That reflected a bigger investment sector, and heavy investing by pension funds and insurance companies in smaller early stage companies as well as entrepreneurialism and creativity. We have migrated to the European model of no new equity, or worse equity withdrawal, but remained with the Anglo-Saxon openness with regard to take-overs hence the dramatic contraction. The list is not the entire investable orbit for two reasons. Firstly we do invest in companies with a market capitalisation below £30m, and eliminating the £30m market capitalisation floor changes the numbers as shown in the table below. Secondly a number of companies classified within support services, electrical and electronic equipment and industrials are also in the remit, but for illustrative purposes this table highlights how small the UK quoted sector has become in a global context.

Number of quoted companies with market capitalisation <£1bn

Sector	UK	W Europe	N America	Asia Dev	Asia Emerging	World
Technology	140	521	1,075	1,369	666	4,174
Media	80	195	354	228	185	1,222
Electronic & Electrical Equipment	46	162	342	863	448	2,082
Total	266	878	1,771	2,460	1,299	7,478

Number of quoted companies with market capitalisation >£1bn

Sector	UK	W Europe	N America	Asia Dev	Asia Emerging	World
Technology	7	18	137	64	23	258
Media	11	24	38	14	13	112
Electronic & Electrical Equipment	3	6	29	34	14	88
Total	21	48	204	112	50	458

Source:Bloomberg 31/12/2012

The TMT sector targeted remains dynamic, and we shall continue to be vigilant in targeting value in any geographic market. However, the UK and US remain preferred locations for the reliable auditing and minority protections. The US is the best environment for companies to scale to address the largest markets, but has inefficiencies in the smaller companies market, and is rather too efficient in larger companies' valuations. Unlike the UK there is no system of house brokers to promote companies. The micro-cap market in the US and UK seems to be where value lies, and to find the same value in Asia and Europe requires greater selectivity. I draw attention to the fact that there are only 25 companies in Europe including the UK in the Bloomberg defined technology sector with a market value exceeding £1bn. This list includes a number of depressingly challenged companies such as Nokia, Alcatel Lucent, STMicro and Infineon. The UK boasts companies with momentum such as Arm, Imagination and Aveva, Germany has SAP and the Netherlands ASML and ASM. In contrast the US has companies with an order of magnitude greater scale such as Apple, Google, Qualcomm, Intel, Microsoft and IBM. While we continue to find value in smaller UK and European companies, Europe really is marginal in terms of larger capitalisation technology companies, because at the year end there were 137 US technology companies with a market value exceeding £1bn. The Japanese technology sector is in poor shape. We have elected not to invest in Japan because there do not appear to be sufficient opportunities to justify the required resource. There is a paucity of entrepreneurialism, and the big companies are challenged. Elpida, Sharp, Panasonic and Sony have had particularly challenging years. The TV market has moved to Korea, and the computer games consoles have had a terrible Christmas as smart phones take the spending $. Korea has an extraordinarily strong company in Samsung and LG is not far behind. Taiwan has TSMC, and a number of challenged companies in the PC supply chain. China has many jobs, but few with pricing power. Furthermore, China is ceasing to be a low cost manufacturer.

With increased automation and component integration the labour cost is low versus import tariffs into the US and Europe. It seems probable that there will be selective repatriation of manufacturing to the US. They own the companies with brands, innovation and low energy costs. Apple have already announced a modest initiative to build Macs in the US.

In a global economy beset by Government deficits the spotlight is on companies with subnormal tax charges. The technology sector in particular has the ability to move IP and manufacturing around the world with its global supply chain. Many of the large companies have significant offshore earnings with low tax charges, but are not repatriating profits to the US because they face 35% Federal tax charges, and state taxes on top. It has to be a major consideration on Capitol Hill to adjust these taxes. It is anomalous that the tax system is incentivising Apple to fund the capital investment of its supply chain in the Far East rather than repatriating profits to invest at home. The US Government may consider charging companies a reduced tax of say 10% on foreign earnings, but then permit repatriation. This tax anomaly has been an additional reason why so many UK companies have been acquired by US companies who have cash offshore not worth face value.

The Company continues to have a £50m loan facility and an associated interest swap, which continues to trade at a similar loss as a year ago. Whilst we value the flexibility, and have benefited from the use of the capital that the facility affords clearly the timing of the swap was ill-judged. After consideration it seems appropriate to continue the position.

Summary

2012 has been adequate, but could have been better. The five year performance is good. The outlook for 2013 remains uncertain, but from the perspective of the sectors targeted by Herald the US seems to be better placed to address its economic issues than elsewhere. There remains more value in microcaps, but the ability for companies to grow profits appears to be more challenging than it has been. The UK portfolio seems likely to decline as a percentage of the whole. While a degree of caution seems rational it remains a mandate that seems to have attractions relative to most other asset classes. We continue with enthusiasm.

Performance Attribution (in sterling terms) (unaudited)

	Comparative index allocation		Herald asset allocation		Performance*		Contribution to relative return	Contribution attributable to:
Equity Markets	01.01.12	31.12.12	01.01.12	31.12.12	Herald	Comparative Index		Stock selection	Asset allocation†
	%	%	%	%	%	%	%	%	%
UK	66.7	66.7	68.6	72.2	18.0	22.4	(2.4)	(2.5)	0.1
Europe ex. UK	-	-	2.1	2.5	17.5	-	-	-	-
USA	33.3	33.3	25.0	21.3	1.4	4.5	0.5	(0.5)	1.0
Asia Pacific ex.   Japan	-	-	6.9	5.6	10.3	-	(0.3)	-	(0.3)
Emerging   Markets	-	-	0.4	0.4	13.4	-	-	-	-
Bonds	-	-	5.8	6.4	5.0	-	(0.6)	-	(0.6)
Cash	-	-	6.8	5.6	0.3	-	(1.1)	-	(1.1)
Swap	-	-	(4.5)	(4.0)	n/a	-	0.3	-	0.3
Loans	-	-	(11.1)	(10.0)	2.1	-	1.4	-	1.4
Total	100.0	100.0	100.0	100.0	13.5	16.3	(2.4)	(3.1)	0.7

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 13.5% against a comparative index return of 16.3% translates into a relative return of (2.4%), divide the portfolio return of 113.5 by the comparative index return of 116.3 and subtract one.

†    Asset allocation includes the contribution attributable to currency movements.

Statistics and Performance Report

	At inception 16 February 1994	At 31 December 2011	At 31 December 2012	Performance since 31 December 2011	Performance since inception
NAV per share	98.7p	563.7p	632.8p	12.3%	541.1%
Share price	90.9p	455.0p	513.0p	12.7%	464.4%
FTSE 100 Index	3,417.7	5,572.3	5,897.8	5.8%	72.6%
Numis Smaller Companies Index plus AIM (capital gains ex. investment companies)	1,750.0	3,101.6	3,704.0	19.4%	111.7%
Russell 2000 (small cap) Technology Index (in sterling terms)†	688.7*	880.9	917.6	4.2%	33.2%

*        At 9 April 1996 being the date funds were first available for international investment.

†       The Russell 2000 (small cap) Technology Index was rebased during 2009 following some minor adjustments to its constituents. The rebased index is used from 31 December 2008 onwards.

Comparative index: The portfolio comparative index against which performance is measured is 2/3 Numis (previously Hoare Govett Smaller Companies) Smaller Companies Index plus AIM (capital gains ex. investment companies) and 1/3 Russell 2000 (small cap) Technology Index (in sterling terms).

Past performance is not a guide to future performance.

Portfolio Performance for the 12 months to 31 December 2012

Equity markets	Performance (total return) %
UK	18.0
Europe ex. UK	17.5
USA	1.4
Asia Pacific ex. Japan	10.3
Emerging Markets	13.4
Fixed Interest	5.0

For further information please contact:

Miss Katie Potts, Manager

Herald Investment Trust plc

Tel: [phone]

Baillie Gifford & Co

Secretary

Tel: [phone]

Income statement

The following is the unaudited preliminary statement for the year to 31 December 2012 which was approved by the Board on 19 February 2013. The Directors of Herald Investment Trust plc are recommending to the Annual General Meeting of the Company to be held on 23 April 2013 the payment of a final dividend of 1.00p (2011 - 1.00p) per Ordinary share for the year ended 31 December 2012.

	For the year ended 31 December 2012 (unaudited)			For the year ended 31 December 2011 (audited)
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains/(losses) on investments	-	54,673	54,673	-	(25,012)	(25,012)
Currency losses	-	(39)	(39)	-	(66)	(66)
Income (note 3)	9,164	-	9,164	9,171	-	9,171
Investment management fee	(4,950)	-	(4,950)	(4,752)	-	(4,752)
Other administrative expenses	(329)	-	(329)	(350)	-	(350)
Net return before finance costs and taxation	3,885	54,634	58,519	4,069	(25,078)	(21,009)
Finance costs of borrowings	(2,998)	-	(2,998)	(2,978)	-	(2,978)
Net return on ordinary activities before taxation	887	54,634	55,521	1,091	(25,078)	(23,987)
Tax on ordinary activities	(137)	-	(137)	(144)	-	(144)
Net return on ordinary activities after taxation	750	54,634	55,384	947	(25,078)	(24,131)
Net return per ordinary share (note 4)	0.94p	68.78p	69.72p	1.19p	(31.43p)	(30.24p)
Dividend per ordinary share (note 5)	1.00p			1.00p

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

All revenue and capital items in this 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 2012 (unaudited)		At 31 December 2011 (audited
	£'000	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		543,142		488,689
Current assets
Debtors	1,985		1,947
Cash and short term deposits	28,950		30,021
	30,935		31,968
Creditors:
Amounts falling due within one year (note 6)	(51,834)		(51,001)
Derivative financial instruments (note 6)	(20,297)		(20,357)
	(72,131)		(71,358)
Net current liabilities		(41,196)		(39,390)
Total net assets		501,946		449,299
Capital and reserves
Called up share capital		19,830		19,924
Share premium		73,738		73,738
Capital redemption reserve		2,122		2,028
Capital reserve		403,415		350,721
Revenue reserve		2,841		2,888
Shareholders' funds		501,946		449,299
Net asset value per ordinary share (including current year income)		632.78p		563.75p
Net asset value per ordinary share (excluding current year income)		631.84p		562.56p
Ordinary shares in issue (note 7)		79,437,013		79,799,598

Reconciliation of movements in shareholders' funds

For the year ended 31 December 2012 (unaudited)

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 January 2012	19,924	73,738	2,028	350,721	2,888	449,299
Net return on ordinary activities after taxation	-	-	-	54,634	750	55,384
Shares bought back	(94)	-	94	(1,940)	-	(1,940)
Dividends paid during the year	-	-	-	-	(797)	(797)
Shareholders' funds at 31 December 2012	19,830	73,738	2,122	403,415	2,841	501,946

* Capital reserve as at 31 December 2012 included investment holding gains of £115,847,000.

For the year ended 31 December 2011 (audited)

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 January 2011	19,978	73,738	1,974	376,931	1,941	474,562
Net return on ordinary activities after taxation	-	-	-	(25,078)	947	(24,131)
Shares bought back	(54)	-	54	(1,132)	-	(1,132)
Shareholders' funds at 31 December 2011	19,924	73,738	2,028	350,721	2,888	449,299

* Capital reserve as at 31 December 2011 included investment holding gains of £72,225,000.

Cash flow statement

	For the year ended 31 December 2012 (unaudited)		For the year ended 31 December 2011 (audited)
	£'000	£'000	£'000	£'000
Net cash inflow from operating activities		3,526		3,547
Servicing of finance
Loan and derivative interest	(2,998)		(2,935)
Net cash outflow from servicing of finance		(2,998)		(2,935)
Financial investment
Purchase of investments	(63,903)		(89,449)
Sale of investments	65,041		80,493
Net cash inflow/(outflow) from financial investment		1,138		(8,956)
Equity dividend paid		(797)		-
Net cash inflow/(outflow) before financing		869		(8,344)
Financing
Bank loans drawn down	-		25,000
Bank loans repaid	-		(25,000)
Shares repurchased	(1,940)		(1,132)
Net cash outflow from financing		(1,940)		(1,132)
Decrease in cash		(1,071)		(9,476)
Reconciliation of net cash flow to movement in net debt
Decrease in cash for period		(1,071)		(9,476)
Movement in net debt in period		(1,071)		(9,476)
Net debt at 1 January		(19,979)		(10,503)
Net debt at 31 December		(21,050)		(19,979)
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		58,519		(21,009)
(Gains)/losses on investments		(54,673)		25,012
Currency losses		39		66
Increase in accrued income		(287)		(307)
(Increase)/decrease in other debtors		(31)		23
Increase/(decrease) in creditors		26		(7)
Amortisation of fixed income book cost		112		(25)
Income tax (suffered)/repaid		(3)		4
Overseas tax suffered		(137)		(144)
Realised currency loss		(39)		(66)
Net cash inflow from operating activities		3,526		3,547

Distribution of assets

	At 31 December 2012 % (unaudited)	At 31 December 2011 % (audited)
Equities:
United Kingdom	63.2	59.2
Continental Europe	2.2	1.8
USA	18.6	21.6
Asia Pacific	4.9	6.0
Emerging Markets	0.4	0.4
Total equities	89.3	89.0
Sterling denominated bonds	3.1	3.1
EUR denominated bonds	2.5	1.9
Net current assts	5.1	6.0
Total assets (before deduction of bank loans and derivative financial instruments)	100.0	100.0

Notes to the condensed financial statements (unaudited)

1.	The financial statements for the year to 31 December 2012 have been prepared on the basis of accounting policies which are consistent with those set out in the Company's Annual Report and Financial Statements at 31 December 2011. 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 the Companies Act 2006. Herald Investment Management Limited is appointed investment manager 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.
3.	Income		31 December 2012 £'000			31 December 2011 £'000
	Income from investments
	Income from investments and interest receivable		9,164			9,171
			9,164			9,171
4.	Net Return per ordinary share		31 December 2012 £'000			31 December 2011 £'000
	Revenue return		750			947
	Capital return		54,634			(25,078)
	Total return		55,384			(24,131)
	Net return per Ordinary share is based on the above totals of revenue and capital and on 79,437,013 Ordinary shares (2011 - 79,799,598) being the weighted average number of Ordinary shares in issue during the year. There are no dilutive or potentially dilutive shares in issue.
5.	Ordinary dividends Amounts recognised as distributions in the period:	2012		2011	2012 £'000		2011 £'000
	Previous year's final	1.00p		-	797		-
	Set out below are the total dividends payable in respect of the financial year, which is the basis on which the requirements of Section 1158 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year ended 31 December 2012 is £750,000 (2011 - £947,000).
	Amounts paid and proposed in respect of the period:	2012		2011	2012 £'000		2011 £'000
	Proposed final dividend per Ordinary share	1.00p		1.00p	793		797
	If approved, the current year's proposed dividend will be paid on 3 May 2013 to all shareholders on the register at the close of business on 12 April 2013. The ex-dividend date is 10 April 2013.

6.	The Company has a £50 million multi-currency variable rate loan facility with The Royal Bank of Scotland plc, which comprises two £25 million tranches expiring in May 2013. This was replaced on 6 February 2013 with a £50 million facility maturing 31 December 2014 At 31 December 2012, there were outstanding drawings of £50 million (2011 - £50 million). Interest on the loans is payable in quarterly instalments in January, April, July and October. The estimated repayment value of the loan at 31 December 2012 was £50 million. The indicative costs of repaying the loan as at 31 December 2012 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 2012 was an estimated liability of £20.3 million (2011 - £20.4 million) which was based on the swap provider's valuation.
7.	At the Annual General Meeting in April 2012, Shareholders granted the Company authority to purchase shares in the market up to 11,946,772 Ordinary shares (equivalent to 14.99% of its issued share capital at that date). During the year to 31 December 2012, a total of 375,000 (2011 - 215,000) Ordinary shares with a nominal value of £93,750 (2011 - £53,750) were bought back at a total cost of £1,940,000 (2011 - £1,132,000). At 31 December 2012 the Company had authority to buy back a further 11,571,772 Ordinary shares. Under the provisions of the Company's Articles share buy-backs are funded from the capital reserve.
8.	During the period transaction costs on purchases amounted to £310,000 (2011 - £424,000) and transaction costs on sales amounted to £218,000 (2011 - £198,000).
9.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2012. The financial information for 2011 is derived from the statutory accounts for 2011 which have been delivered to the Registrar of Companies. The Auditors have reported on the 2011 accounts; their report was unqualified and it did not contain a statement under sections 495 to 497 of the Companies Act 2006. The audit report for the financial statements for the year ended 31 December 2012 has yet to be signed but it is expected that the statutory accounts for 2012 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.
10.	The Annual Report and Financial Statements will be available on the Managers' website www.heralduk.com† on or around 14 March 2013. None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

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

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