Final Results

RNS Number : 6117Y

Herald Investment Trust PLC

25 February 2013

 



RNS Announcement: Preliminary Results (amendment to Chairman's Statement originally released 20/02/2013)

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 Board has been considering how to address the Alternative Investment Fund Managers Directive. This requires the appointment of an Alternative Investment Fund Manager with separate functions for internal audit, risk management and compliance and certain other parameters. It also requires the appointment of a separate depositary. The Board currently appoints Herald Investment Management Ltd as fund manager. The fund administration, including fund accounting and secretarial, is undertaken independently by Baillie Gifford & Co with daily reconciliations between the manager and the administrator, and the administrator and independent custodian, providing a high level of investor protection and oversight. Furthermore, the Board is responsible for overseeing the Trust's risks.

The Board will endeavour to accommodate the Directive, while incurring the minimum additional cost, and without incurring too much additional risk associated with the likely complexity inherent in the AIFMD regime, and without too much distraction for the manager from the investment process. However, it will not be possible to avoid the costs of the independent depositary which are expected to be material in relation to the Company's revenue account.  The Board does not consider that the Directive is in the interests of shareholders and does not believe that it will provide any perceptible benefit to them.  Investment trusts, which already comply with company law and the listing rules of the Stock Exchange, were not the original target of this proposed European Union law, but have regrettably been caught within its scope.  The impact is particularly burdensome in the case of a successful specialist company such as Herald, which plays a valuable part in supplying scarce equity capital to young British technology companies. 

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

 

END

 

 

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