Annual Financial Report

RNS Number : 5020T

Schroder UK Mid Cap Fund PLC

13 December 2012

 



13 December 2012

Annual Report and Accounts

Schroder UK Mid Cap Fund plc (the "Company") hereby submits its Annual Report and Accounts for the year ended 30 September 2012 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.1.

The Company's Annual Report and Accounts for the year ended 30 September 2012 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website http://www.schroderukmidcapfund.com.  Please click on the following link to view the document:

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at www.hemscott.com/nsm.do.

Enquiries:

John Spedding

Schroder Investment Management Limited                                        Tel: [phone]

Chairman's Statement

Performance

During the year under review, the Company's net asset value produced a total return of 27.7%. The share price produced a total return of 30.6% over the year and the FTSE Mid 250 (ex-Investment Companies) Index a total return of 25.5%.

Long-term performance continued to be very good with the Company outperforming the benchmark in eight of the last nine years.

Dividends

An increasingly important part of total return has come from revenue, and earnings per share increased by 14.5% during the year from 6.74 pence per share to 7.72 pence per share. The Directors therefore recommend the payment of a final dividend of 6.82 pence per share for the year ended 30 September 2012, representing an increase of 10.0% on the final dividend of 6.20 pence per share paid in respect of the previous financial year.

A resolution approving the payment of the final dividend for the year ended 30 September 2012 will be proposed at the Annual General Meeting. If passed, the dividend will be paid on 30 January 2013 to shareholders on the register at 4 January 2013.

VAT Recovery

Subsequent to the year end, the Company received a one-off repayment of £309,292 from the previous manager, Murray Johnstone Ltd in respect of historic VAT paid on management fees whilst it was investment manager together with interest accrued thereon.

Gearing Facility

During the year, the Company maintained a £15 million revolving credit facility, of which £10 million was drawn throughout the year. At the beginning of the year net gearing (which takes into account cash held in the portfolio as well as borrowings) stood at 2.8% and this had increased to 3.7% by the end of the year. During the year, net gearing fluctuated between 2% and 8%. Parameters for the use of gearing have been established and these are reviewed regularly by the Board.

Purchase of Shares for Cancellation and Treasury Shares

At the Company's last Annual General Meeting held on 27 January 2012, the Company was granted authority to purchase up to 14.99% of its issued share capital for cancellation or for holding in Treasury. During the year ended 30 September 2012, the Company did not purchase any shares for cancellation or for holding in treasury.

The decision whether to purchase shares is addressed regularly in Board discussions. Whilst share buy-backs are one method of addressing discount levels, their effectiveness depends on the size and nature of the share register. Your Board believes that the most sustainable way to close the discount is to increase demand for the Company's shares by effective marketing over the longer term, and its strong performance track record. In the meantime, the Board will continue to consider whether share purchases should be made on a regular basis, alongside other means of discount control. To provide maximum flexibility for the future, it is proposed that the existing authority be renewed at the forthcoming Annual General Meeting.

Update to the Company's Articles of Association

Following a change in legislation earlier this year, investment trusts may now distribute capital profits. Under the previous legislation, there was a requirement for the Company's Articles to contain a prohibition on the distribution of capital profits by way of a dividend or otherwise than by way of repurchase of the Company's shares. In order to align the Company's constitution with the new regulations, a special resolution will be proposed at the forthcoming Annual General Meeting to amend the Articles of Association to permit the Company to distribute capital profits, by amending Article 121 and to remove the general prohibition on capital distributions in Article 128.

The Directors do not currently intend to utilise the ability to pay distributions from capital, however they believe that it is in the best interests of the Company and its shareholders to make this change to the Company's Articles of Association.

Strategy

Your Board continues to review the suitability of the Company's mandate and its fund manager, as described later in the Accounts. This is an on-going process, but I thought it might be useful to outline why the Board believes in the current mandate and why - with next April being the tenth anniversary of Schroders being appointed - we continue to use them as our fund managers.

The point of Investing in Mid-Caps

It is dangerous to generalise from history, and past performance is not a reliable indicator of future results. The aggregate return from the Company's shares was quite different for a shareholder who bought 12 years ago rather than 10, for example, while the next decade may be very different from the last one. However, the  graph in the Accounts clearly illustrates the Company's outperformance of both the benchmark and the FTSE 100 Index over the period from 1 May 2003 (when Schroders took responsibility for the management of the portfolio) to 30 September 2012. We believe, however, that the UK mid cap sector continues to offer three investment characteristics different from investing in large caps:

•        It still offers opportunities to buy businesses unrepresented in the large cap indices. Examples in the portfolio include companies as diverse and unique as Dignity (the UK's largest listed manager of funeral homes), Rightmove (a residential property portal), Dechra Pharmaceutical (the veterinary drug company), and Devro (one of the world's largest makers of sausage skins).

•        There is a corresponding absence of the mega-cap global companies that dominate the FTSE 100 index - for example the large miners, oil companies, telecom companies and banks. Their profits are inevitably dependent on global trends, while their size often constrains their ability to grow quickly.

•        The result of both factors is that there are still tremendous opportunities for stock-pickers. Some of the more unique mid-cap companies are challenging to analyse, and often not as well covered by investment institutions. It is an ideal environment for fund managers who have the time and the resources to find the value.

The trigger that turns that value into profit in mid-caps is often M&A - for example a takeover, or a buyout - and this has been a factor behind the shrinking of the number of listed companies outside the FTSE 100 index from 582 in 2000 to 335 today. ¹ The portfolio benefitted from this in recent years with its investments in Chloride, Dana Petroleum, Forth Ports and Nestor Healthcare. The fund manager thinks there is further opportunity for this in coming years from some of the current holdings. It also believes that it has a greater ability to influence this and other aspects of the holdings' future, as relationships with management are often easier and more direct than with larger companies.

Performance of the Company relative to its benchmark is as difficult to predict as future market movements, but the Board continues to appoint Schroders as its fund manager. It is pleasing to report that the Company's shares have outperformed the other UK-listed mid-cap investment trusts since Schroders' appointment in 2003. ²

Outlook

The world's economic challenges - such as low growth, the Eurozone, and rising government debt - are undeniable, and few of the holdings can abstract from the broader environment. The Company's investment policy, however, is not being based around a specific view of how the challenges are resolved. It targets instead much the same as was achieved in the last decade: giving investors access to a diversified selection of some of the UK's most attractive mid-cap shares, chosen by the same team that produced the performance of the last decade. The Board believes that mid-caps have a role to play in most long-term UK equity portfolios, and wants your Company to be a leading vehicle for that exposure.

Peter Timms, CBE

Chairman

12 December 2012

¹ FTSE All Share companies excluding investment companies and those in the FTSE 100 index . Source : Deutsche Bank and Schroders as at 5/11/12.

² Total share return ,1 May 2003 to 31 October 2012. Source: Morningstar.

Investment Manager's Review

Performance

Over the 12 months to 30 September 2012, the Company's net asset value on a total return basis rose by 27.7%. This compared with a 25.5% total return in the benchmark, the FTSE Mid 250 (ex-Investment Companies) Index, which was adopted from 1 April 2011.

Over the period from 1 May 2003 (when Schroders took responsibility for the management of the portfolio) to 30 September 2012, the net asset value has produced a total return of 340.2% and a 359.7% return for the shares compared to a total return of 232.8% for the benchmark over the same period.

Strong positive contributions came from several companies providing support services to the U.S. construction, infrastructure and housebuilding industries, most notably Ashtead, which is benefitting from a trend to the hire rather than the purchase of construction equipment, and Diploma which supplies replacement seals also for construction equipment. Other investments benefitted from the continuing trend to automate manufacturing in China as labour costs rise, including Renishaw and Oxford Instruments. Self-help was another important theme, with new management at set top box manufacturer Pace achieving major improvements in working capital ratios, while wireless connectivity group CSR sold their mobile handset activities to Samsung of Korea for a good price and initiated a tender offer to reduce their own equity.

The principal detractors to performance in the year were card and identity protection provider CPP, which has become involved in a protracted regulatory investigation, and Lamprell, which announced cost overruns on two major wind turbine installation vessels and delays on other oil rig construction projects. Pawnbroker Albemarle & Bond experienced a reduction in profits from gold purchasing, with knock-on effects to the rate of expansion of its pawn shops.

Market Background

Equities have rallied strongly this year as central banks in Europe, the US and Japan have announced significant easing in monetary policy. Extremely low nominal interest rates have driven investors to seek higher returns even at the expense of greater perceived risk. With bank lending still contracting across Europe and corporate confidence low, there has been noticeably less takeover activity in UK Mid-Caps, but increased cash distributions, special dividend payouts and share buy-backs as corporate balance sheets remain strong. Dividend growth has again been healthy across the portfolio.

Portfolio Update

New purchases in the past year have included WS Atkins (consulting engineers) Bodycote (heat treatment), Computacenter (IT services), Filtrona (specialist industrial products), Persimmon (housebuilding), Qinetiq (scientific research), Sports Direct (sportswear retailing), Telecom Plus (utility services) and Yule Catto (nitrile chemicals). Complete disposals have included Croda, Pennon and Wood Group upon promotion to the FTSE 100 Index, Aquarius Platinum, Hansteen, Morgan Crucible, PZ Cussons, Spirax-Sarco and WH Smith. Further investments outside the Mid 250 Index were sold, such as Exillon Energy, E2V Technology, Findel, and Wilmington, reducing the percentage of net assets held outside the benchmark to well below 10% by the end of the Company's financial year.

Outlook

The world is presently a tough place to do business, with uncertainty over the future of the Eurozone, a potential 'fiscal cliff' looming in the U.S. and a changeover of leadership imminent in China. Unsurprisingly these and other factors such as labour unrest in South Africa, rising regulatory risks, and political unrest in the Middle East have restrained both consumer and corporate spending in many geographies. It is to be hoped that some of this uncertainty will reduce in the coming months, so that equity markets can continue to climb the wall of fear.

In the UK, there is presently enough growth in (mainly part-time) private sector employment to offset government cuts and this trend is set to continue. However, the UK Government is still spending more than its income, and policy paralysis in the coalition government is unhelpful.

More positively, UK quoted company balance sheets are generally in rude health, and this will continue to stimulate share buy-backs, special dividend payments, accretive acquisitions and M&A activity, all of which are supportive to valuations.

Schroder Investment Management Limited

12 December 2012

Principal Risks and Uncertainties

The Board has adopted a matrix of key risks which affect its business and a robust framework of internal control which is designed to monitor those risks and to provide a system to enable the Directors to mitigate them as far as possible and which assists in determining the nature and extent of the significant risks the Board is willing to take in achieving its strategic objectives. A full analysis of the Company's system of internal control and its monitoring system is set out in the Corporate Governance Statement in the Accounts. The principal risks are considered to be as follows:

Financial Risk

The Company is exposed to the effect of market fluctuations due to the nature of its business. A significant fall in the UK stockmarket would have an adverse impact on the market value of the Company's portfolio of investments. The Board considers the risk profile of the portfolio at each Board meeting and discusses with the Manager appropriate strategies to mitigate any negative impact arising from substantial changes in the market. The financial risks facing the Company are set out in note 20 to the Accounts.

Gearing

The Company has in place a £15 million (2011: £15 million) credit facility. The draw down on the facility was £10 million (2011: £10 million) at the year-end. At the beginning of the year under review, net gearing was 2.8% and at the end of the year it was 3.7%. In falling markets, any reduction in net asset value and share price is amplified by the gearing. The Directors keep the Company's gearing strategy under constant review and impose strict restrictions on borrowings to mitigate this risk.

Strategic Risk

Over time investment vehicles and asset classes can become out of favour with investors or may fail to meet their investment objectives. This may be reflected in a wide discount of the shares to underlying asset value. Directors periodically review whether the Company's investment remit remains appropriate and continually monitor the success of the Company in meeting its stated objectives. In January 2011 the investment objective of the Company was changed. The new investment policy is to invest in mid cap equities, with the aim of providing a total return in excess of the FTSE Mid 250 (ex-Investment Companies) Index. Further details may be found under "Investment Performance" and "Discount Management" in the Accounts.

Accounting, Legal and Regulatory Risk

In order to continue to qualify as an investment trust, the Company must comply with the requirements of Section 1158 of the Corporation Tax Act 2010. Should the Company not comply with these requirements, it might lose investment trust status and capital gains within the Company's portfolio could, as a result, be subject to Capital Gains Tax.

Breaches of the UK Listing Rules, the Companies Act 2006 or other regulations with which the Company is required to comply, could lead to a number of detrimental outcomes and damage the Company's reputation. Breaches of controls by service providers, including the Manager, could also lead to reputational damage or loss.

The Board's system of internal control seeks to mitigate the potential impact of these risks and it also relies on its Manager and other advisers to assist it in ensuring continued compliance.

Statement of Directors' Responsibilities

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

Company law requires the Directors to prepare accounts for each financial year. Under that law they have elected to prepare the accounts in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these accounts, the Directors are required to:

•          select suitable accounting policies and then apply them consistently;

•          make judgements and accounting estimates that are reasonable and prudent; and

•          state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements respectively.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006. 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 regulation, the Directors are also responsible for preparing a Report of the Directors, Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.

Each of the Directors, whose names and functions are set out in the inside front cover of this report, confirms that, to the best of their knowledge:

•          the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and net return of the Company; and

•          the Report of the Directors includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

Going Concern

The Directors believe that, having considered the Company's investment objective (see inside front cover of the Accounts), risk management policies (see note 20 to the accounts), capital management policies and procedures (see note 21 to the accounts), the nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. For these reasons, they consider that there is reasonable evidence to continue to adopt the going concern basis in preparing the financial statements.

Income Statement

for the year ended 30 September 2012

		2012			2011
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair
value through profit or loss	-	24,195	24,195	-	(2,601)	(2,601)
Income from investments	3,280	14	3,294	2,914	12	2,926
Other interest receivable and similar income	23	-	23	41	-	41
Gross return/(loss)	3,303	24,209	27,512	2,955	(2,589)	366
Investment management fee	(82)	(736)	(818)	(80)	(717)	(797)
Performance fee	-	(159)	(159)	-	(325)	(325)
Administrative expenses	(411)	-	(411)	(413)	-	(413)
Net return/(loss) before finance costs and
taxation	2,810	23,314	26,124	2,462	(3,631)	(1,169)
Finance costs	(21)	(189)	(210)	(20)	(180)	(200)
Net return/(loss) on ordinary activities
before taxation	2,789	23,125	25,914	2,442	(3,811)	(1,369)
Taxation on ordinary activities	-	-	-	(5)	-	(5)
Net return/(loss) on ordinary activities
after taxation	2,789	23,125	25,914	2,437	(3,811)	(1,374)
Return/(loss) per share	7.72p	63.98p	71.70p	6.74p	(10.54)p	(3.80)p

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Total column includes all the information that is required to be disclosed in a Statement of Total Recognised Gains and Losses ("STRGL"). For this reason a STRGL has not been presented.

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

Reconciliation of Movements in Shareholders' Funds

for the year ended 30 September 2012

	Called-up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Merger reserve £'000	Share purchase reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 30 September 2010	9,036	13,971	220	2,184	15,477	54,598	3,264	98,750
Net (loss)/return on ordinary   activities	-	-	-	-	-	(3,811)	2,437	(1,374)
Dividend paid in the year	-	-	-	-	-	-	(2,107)	(2,107)
At 30 September 2011	9,036	13,971	220	2,184	15,477	54,598	3,264	98,750
Net return on ordinary activities	-	-	-	-	-	23,125	2,789	25,914
Dividend paid in the year	-	-	-	-	-	-	(2,241)	(2,241)
At 30 September 2012	9,036	13,971	220	2,184	15,477	73,912	4,142	118,942

Balance Sheet

at 30 September 2012

	2012	2011
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	121,885	97,991
Current assets
Debtors	2,430	639
Cash and short-term deposits	5,636	7,341
	8,066	7,980
Current liabilities
Creditors: amounts falling due within one year	(11,009)	(10,702)
Net current liabilities	(2,943)	(2,722)
Net assets	118,942	95,269
Capital and reserves
Called-up share capital	9,036	9,036
Share premium	13,971	13,971
Capital redemption reserve	220	220
Merger reserve	2,184	2,184
Share purchase reserve	15,477	15,477
Capital reserves	73,912	50,787
Revenue reserve	4,142	3,594
Total equity shareholders' funds	118,942	95,269
Net asset value per share	329.08p	263.58p

Cash Flow Statement

for the year ended 30 September 2012

		2012	2011
		£'000	£'000
Net cash inflow from operating activities		1,709	1,364
Servicing of finance
Interest paid		(217)	(201)
Net cash outflow from servicing of finance		(217)	(201)
Taxation
Taxation paid		-	(4)
Investment activities
Purchases of investments		(34,197)	(44,956)
Sales of investments		33,227	46,319
Special dividend received allocated to capital		14	12
Net cash (outflow)/inflow from investment activities		(956)	1,375
Dividends paid		(2,241)	(2,107)
Net cash (outflow)/inflow before financing		(1,705)	427
Financing		-	-
Net cash (outflow)/inflow in the year		(1,705)	427

Notes to the Accounts

for the year ended 30 September 2012

1. Accounting Policies

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP") and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the "SORP") issued by the Association of Investment Companies in January 2009. All of the Company's operations are of a continuing nature.

Sterling is the Company's functional currency and the presentational currency of the accounts.

The policies applied in these accounts are consistent with those applied in the preceding year.

The accounts have been prepared on the going concern basis. The disclosures on going concern in the Directors' Report in the Accounts form part of the financial statements. The principal accounting policies adopted are set out below.

2. Income
	2012	2011
	£'000	£'000
Revenue:
Income from investments:
UK dividends	3,116	2,767
UK property income distributions	61	53
Stock dividends	103	94
	3,280	2,914
Other interest receivable and similar income:
Deposit interest	23	41
	3,303	2,955
Capital:
Special dividends allocated to capital	14	12

3. Investment management fee

		2012			2011
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Management fee	82	736	818	80	717	797
Performance fee	-	159	159	-	325	325
	82	895	977	80	1,042	1,122

The bases for calculating the investment management fee and performance fee are set out in the Report of the Directors in the Accounts.

4. Return/(loss) per share

	2012	2011
	£'000	£'000
Revenue return	2,789	2,437
Capital return/(loss)	23,125	(3,811)
Total return/(loss)	25,914	(1,374)
Weighted average number of Ordinary shares in issue during the year	36,143,690	36,143,690
Revenue return per share	7.72p	6.74p
Capital return/(loss) per share	63.98p	(10.54)p
Total return/(loss) per share	71.70p	(3.80)p

5. Transactions with the Manager

The Company has appointed Schroder Investment Management Limited (the "Manager"), a wholly owned subsidiary of Schroders plc, to provide investment management, accounting and company secretarial services. If the Company invests in funds managed or advised by the Manager or any of its associated companies, those funds are excluded from the assets used for the purposes of the management fee calculation and therefore attract no fee. Under the terms of the Investment Management Agreement, the Manager is also entitled to receive a secretarial fee and a performance fee. Details of these calculations are given in the Report of the Directors in the Accounts.

The management fee payable in respect of the year ended 30 September 2012 amounted to £818,000 (2011: £797,000) of which £220,000 (2011: £183,000) was outstanding at the year-end. The secretarial fee payable for the year amounted to £111,000 (2011: £105,000) including VAT, of which £40,000 (2011: £30,000) was outstanding at the year-end. A performance fee amounting to £159,000 (2011: £325,000) is payable for the year and the whole of this amount (2011: same) was outstanding at the year-end.

No Director of the Company served as a director of Schroder Investment Management Limited, or any member of the Schroder Group, at any time during the year.

6. Status of announcement

2011 Financial Information

The figures and financial information for 2011 are extracted from the published Annual Report and Accounts for the year ended 30 September 2011 and do not constitute the statutory accounts for that year. The Annual Report and Accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2012 Financial Information

The figures and financial information for 2012 are extracted from the Annual Report and Accounts for the year ended 30 September 2012 and do not constitute the statutory accounts for the year. The Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

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.

 

END

 

 

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