Annual Financial Report

RNS Number : 0452W

Schroder UK Mid Cap Fund PLC

19 December 2013

 

19 December 2013

ANNUAL REPORT AND ACCOUNTS

Schroder UK Mid Cap Fund plc (the "Company") hereby submits its annual financial report for the year ended 30 September 2013 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 2013 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: http://www.rns-pdf.londonstockexchange.com/rns/0452W_-2013-12-19.pdf

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:

Louise Richard

Schroder Investment Management Limited               

Tel: [phone]

Chairman's Statement

Performance

The year ended 30 September 2013 was a positive year for mid cap stocks and I am pleased to report strong performance for your Company during the period, with the Company's net asset value producing a total return of 39.3%1, comparing favourably to an increase of 33.0%2 in the Company's benchmark, the FTSE 250 (ex-Investment Companies) Index. The Company's share price performed particularly strongly, producing a total return of 56.0%1 during the year, reflecting a re-rating of the Company's shares in light of increasing investor interest in the UK mid cap sector.

Long term performance continues to be strong, with the Company's net asset value outperforming the benchmark in eight of the last 10 financial years. An investor in the Company on 1 May 2003, when Schroders were appointed as Manager, would have seen the value of their investment increase six-fold3 by 30 September 2013.

The Investment Manager's Review on pages 7 and 8 of the 2013 Report provides greater detail on performance, market background and investment outlook for the Company.

Dividends

I am also pleased to report that income generated by the portfolio again increased during the year under review, with revenue return per share rising by 11.0% from 7.72 pence per share to 8.57 pence per share. The Directors therefore recommend the payment of a final dividend of 5.45 pence per share for the year ended 30 September 2013, which, together with the interim dividend of 2.25 pence per share paid during the year, represents an increase of 12.9% over dividends declared in respect of the of the previous financial year.

A resolution approving the payment of the final dividend for the year ended 30 September 2013 will be proposed at the Annual General Meeting. If passed, the dividend will be paid on 3 February 2014 to shareholders on the register on 13 December 2013.

Gearing Facility

During the year, the Company renewed the £15 million revolving credit facility with Scotiabank Europe PLC. At the beginning of the year net gearing stood at 3.7% and this had decreased to 2.0% by the end of the year. Parameters for the use of gearing have been established and these are reviewed regularly by the Board.

Purchase of Shares for Cancellation and Discount Management

The discount of the Company's share price to underlying net asset value narrowed significantly during the year from 15.8% at the start of the year to 6.1% on 30 September 2013. The average discount for the year was 12.8%. Since the year-end the position has continued to improve and the share price discount stood at 5.2% as at 13 December 2013.

At the Company's last Annual General Meeting held on 29 January 2013, 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 2013, 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 a continuation of 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.

In light of the continued improvement in the Company's share price relative to net asset value, the Board will also consider opportunities to issue shares to meet demand should the share price move to a sustained premium during the year ahead.

Appointment of a Non-Executive Director

I have previously reported on the planned refreshment of the Board. This continued during the year under review, with the retirement of Mr Chris Jones as a non-executive Director of the Company at the Annual General Meeting held on 29 January 2013 and the appointment of Mrs Clare Dobie as a non-executive Director of the Company with effect from 11 September 2013. Mrs Dobie's biographical details can be found on the inside front cover of this Report. Mrs Dobie brings experience of the fund management industry in general and marketing in particular.

In accordance with the Company's Articles of Association, a resolution to elect Mrs Dobie as a Director of the Company will be proposed at the forthcoming Annual General Meeting.

Long-Term Performance

Last year I mentioned that May 2013 was going to be the tenth anniversary of Schroders' appointment as the Company's Investment Manager. It has been a decade of success, both in terms of absolute returns and relative to the Company's benchmark, and it is pleasing to report that this has continued for another year. I am delighted to add that your Company has been named "Best UK Growth Fund" in Investment Week's Investment Company of the Year Awards 2013.

Outlook

A year ago I also mentioned that the UK mid cap sector continued to offer three investment characteristics different from large caps:

•          opportunities to invest in businesses unrepresented in the large cap indices within a broadly diversified index;

•          an absence of the mega-cap global companies whose size often constrains their ability to grow quickly; and

•          the consequent tremendous opportunities for mid cap stock-pickers.

The growth in the value of the portfolio suggests that many of these opportunities have become increasingly recognised by the wider market. The Board notes the comments in the Investment Manager's Review about the short-term challenge of finding new opportunities to replace holdings hitting their target prices: the portfolio has benefited from substantial gains in investee companies. The Board takes confidence in the quality of companies in the portfolio and looks to their earnings growth in a recovering economy to drive performance from here.

Annual General Meeting

The Company's Annual General Meeting will be held at 12.00 noon on Friday, 31 January 2014 and shareholders are encouraged to attend. As in previous years, the meeting will include a presentation by the Investment Manager on the Company's investment strategy and market prospects.

Peter Timms, CBE

Chairman

18 December 2013

1Source: Morningstar.

2Source: Thomson Financial Datastream.

3Source: Morningstar/Thomson Financial Datastream. Assumes dividends reinvested.

Investment Manager's Review

Performance

Over the 12 months to 30 September 2013, the Company's net asset value on a total return basis rose by 39.3%1. This compared with a 33.0%2 total return in the benchmark, the FTSE 250 (ex-Investment Companies) Index.

Over the period from 1 May 2003 (when Schroders took responsibility for management of the portfolio) to 30 September 2013, the Company's net asset value produced a total return of 519%1 while the shares produced a total return of 617%1, compared to a total return of 342%2 for the benchmark3 over the same period.

Strong positive contributions for the second year running came from companies providing support services to the US construction, infrastructure and housebuilding industries, most notably Ashtead, which is benefiting from a multi-year shift to the hire rather than purchase of construction equipment, and Keller which provides early stage specialist ground engineering skills.

Other investments benefited from portfolio acquisitions and divestments, for example Daily Mail & General Trust reduced its exposure to UK regional newspapers and re-deployed the proceeds in a share buy-back. Dignity improved its presence in the north of England via the acquisition of a portfolio of 40 funeral locations. Controls and signalling group Invensys received a takeover bid from Schneider Electric at a useful premium.

The principal detractors from performance did not in general suffer absolute declines in share prices, but lagged a very strong advance in the benchmark. Two exceptions were translation services group SDL which announced a series of profit warnings arising from poor sales and market execution and slow integration of prior acquisitions, and Anglo Pacific Group which suffered falling royalty income in tandem with weaker coal prices.

Market Background

Equities have advanced strongly this year, particularly in developed economies, as concerns over emerging market growth rates have surfaced. In the UK, forecasters have lifted their expectations for the rate of economic growth, not least because recent policy changes have begun to stimulate the housing market and private sector employment. Continuing low interest rates on deposits and a mid-year correction in bond markets have driven investors to seek the higher returns on offer in equities, and confidence has improved to the extent that the IPO market in London has recently re-opened.

Portfolio Update

New purchases in the past year have included Close Brothers (specialist banking), Soco (oil producer), DCC (specialist distributor), Enquest (oil producer), Jardine Lloyd Thompson (insurance broker), London Stock Exchange, N Brown (online and mail order fashion retailer), Redrow (housebuilder) and Supergroup (branded young fashion retailer).

Complete disposals have included easyJet, London Stock Exchange, Persimmon, Sports Direct, Travis Perkins and William Hill each upon promotion to the FTSE 100 Index, and De la Rue, Essentra, Oxford Instruments, Renishaw and RPC on reaching our fair value targets. The exit from legacy smaller company holdings was substantially completed with disposals of Albemarle & Bond, CPP, E2V, Shanks and Local Shopping Real Estate Investment Trust.

Outlook

The past 12 months has seen a significant appreciation in the valuation of the UK mid cap universe in which this Company invests. In many cases company valuations have risen faster than underlying earnings as the wider investment community has been attracted to the wide range of unique businesses on offer.

Looking ahead, therefore, the short-term challenge is to find new investments at attractive prices to replace those that have exceeded fair value or indeed have been promoted into the FTSE 100 Index. The task is not made easier by the lack of clarity in US government policy as regards the timing and rate of tapering of their quantitative easing measures.

More pertinently in our own domestic market, the forthcoming general election due in 18 months' time will increasingly elicit populist policy proposals and counter-proposals from the various political parties as they jockey for position with the electorate. This will likely impact a wider range of industry sectors as the election approaches, with consumers likely to benefit at the expense of businesses.

It should however be noted that approximately half of the revenues generated by our investee companies are derived outside the United Kingdom, mitigating this particular political risk.

Our investments are also well financed, with approximately half carrying no net debt. This gives them the ability to grow through organic investment and acquisitions, and our focus remains on management teams which display rigour in capital allocation, giving us confidence that they will continue to add value. The processes employed over the last decade remain unchanged.

Schroder Investment Management Limited

18 December 2013

1Source: Morningstar.

2Source: Thomson Financial Datastream.

3The Company's benchmark changed from the FTSE All-Share, ex-Investment Companies Index, ex-FTSE 100 Index, to the FTSE 250 (ex-Investment Companies) Index on 1 April 2011.

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 on pages 22 to 26 of the 2013 Annual Report. 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. A detailed breakdown of financial risks facing the Company is set out in note 20 on pages 39 to 42 of the 2013 Annual Report.

Gearing

The Company has in place a £15 million (2011: £15 million) credit facility, which has provision to be increased to £20 million. As at 30 September 2013, net gearing stood at 2.0% (2012: 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. The Company's gearing continues to be operated within pre-agreed limits so that gearing does not exceed 25%. Details of the Company's credit facility are given in note 20(a)(i) on page 40 of the 2013 Annual Report.

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. Further details may be found under "Investment Performance" and "Discount Management" on page 12 of the 2013 Annual Report.

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 Report of the Directors, the Corporate Governance Statement, 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.

Each of the Directors, whose names and function are set out in the inside front cover of the 2013 Annual 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;

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

•          considers that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

Going Concern

The Directors believe that, having considered the Company's investment objective (see inside front cover), risk management policies (see note 20 to the accounts on pages 39 to 42 of the 2013 Annual Report), capital management policies and procedures (see note 21 to the accounts on page 42 of the 2013 Annual Report), expenditure projections and the fact that the Company's assets comprise readily realiseable securities that can be sold to meet funding requirements if necessary, 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 2013

		2013			2012
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at    fair value through
profit or loss	-	44,409	44,409	-	24,195	24,195
Income from investments	3,619	132	3,751	3,280	14	3,294
Other interest receivable and   similar income	154	-	154	23	-	23
Gross return	3,773	44,541	48,314	3,303	24,209	27,512
Investment management fee	(311)	(725)	(1,036)	(82)	(736)	(818)
VAT recoverable	106	69	175	-	-	-
Performance fee	-	(807)	(807)	-	(159)	(159)
Administrative expenses	(424)	-	(424)	(411)	-	(411)
Net return before finance costs   and taxation	3,144	43,078	46,222	2,810	23,314	26,124
Finance costs	(43)	(99)	(142)	(21)	(189)	(210)
Net return on ordinary activities   before taxation	3,101	42,979	46,080	2,789	23,125	25,914
Taxation on ordinary activities	(5)	-	(5)	-	-	-
Net return on ordinary activities   after taxation	3,096	42,979	46,075	2,789	23,125	25,914
Return per share	8.57p	118.91p	127.48p	7.72p	63.98p	71.70p

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 2013

	Called-up		Capital		Share
	share	Share	redemption	Merger	purchase	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 September 2011	9,036	13,971	220	2,184	15,477	50,787	3,594	95,269
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
Net return on ordinary activities	-	-	-	-	-	42,979	3,096	46,075
Dividends paid in the year	-	-	-	-	-	-	(3,278)	(3,278)
At 30 September 2013	9,036	13,971	220	2,184	15,477	116,891	3,960	161,739

Balance Sheet

at 30 September 2013

	2013	2012
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	164,359	121,885
Current assets
Debtors	2,907	2,430
Cash and short term deposits	6,737	5,636
	9,644	8,066
Current liabilities
Creditors: amounts falling due within one year	(12,264)	(11,009)
Net current liabilities	(2,620)	(2,943)
Net assets	161,739	118,942
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	116,891	73,912
Revenue reserve	3,960	4,142
Total equity shareholders' funds	161,739	118,942
Net asset value per share	447.49p	329.08p

Notes to the Accounts

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 a going concern basis. The disclosures on going concern in the Report of the Directors on page 16 of the 2013 Annual Report form part of the financial statements. The principal accounting policies adopted are set out below.

2. Income

		2013	2012
		£'000	£'000
Revenue:
Income from investments:
UK dividends		3,565	3,116
UK property income distributions		54	61
Stock dividends		-	103
		3,619	3,280
Other interest receivable and similar income:
Deposit interest		20	23
VAT reclaim interest		134	-
		154	23
Total revenue		3,773	3,303
Capital:
Special dividends allocated to capital		132	14

3. Investment management and performance fees

	2013	2012
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Management fee1	311	725	1,036	82	736	818
Performance fee1	-	807	807	-	159	159
VAT recoverable2	(106)	(69)	(175)	-	-	-
	205	1,463	1,668	82	895	977

1 The bases for calculating the investment management fee and performance fee are set out in the Report of the Directors on page 15 of the 2013 Annual Report.

2 VAT recoverable is in respect of the period from 1 January 1990 to 4 December 1996.

4. Return per share

	2013	2012
	£'000	£'000
Revenue return	3,096	2,789
Capital return	42,979	23,125
Total return	46,075	25,914
Weighted average number of Ordinary shares in issue during the year	36,143,690	36,143,690
Revenue return per share	8.57p	7.72p
Capital return per share	118.91p	63.98p
Total return per share	127.48p	71.70p

5. Net asset value per share

	2013	2012
Net assets attributable to Ordinary shareholders (£'000)	161,739	118,942
Ordinary shares in issue at the year end	36,143,690	36,143,690
Net asset value per share	447.49p	329.08p

6. Dividends

(a) Dividends paid and declared

	2013	2012
	£'000	£'000
2012 final dividend paid of 6.82p (2011: 6.20p)	2,465	2,241
Interim dividend of 2.25p (2012: Nil)	813	-
Total dividends paid in the year	3,278	2,241
	2013	2012
	£'000	£'000
2013 final dividend declared of 5.45p (2012: 6.82p)	1,970	2,465

During the year, the Board determined that henceforth, the Company will pay an interim dividend in addition to a final dividend and that the quantum of the final dividend will reflect this.

(b) Dividends for the purposes of Section 1158 of the Corporation Tax Act 2010 ("Section 1158")

The requirements of Section 1158 are considered on the basis of dividends declared in respect of the financial year as shown below. The revenue available for distribution by way of dividend for the year is £3,096,000 (2012: £2,789,000).

	2013	2012
	£'000	£'000
Interim dividend of 2.25p (2012: Nil)	813	-
Final dividend of 5.45p (2012: 6.82p)	1,970	2,465
	2,783	2,465

7. 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 on page 15 of the 2013 Annual Report.

The management fee payable in respect of the year ended 30 September 2013 amounted to £1,036,000 (2012: £818,000) of which £801,000 (2012: £220,000) was outstanding at the year end. The secretarial fee payable for the year amounted to £114,000 (2012: £111,000) including VAT, of which £85,000 (2012: 40,000) was outstanding at the year end. A performance fee amounting to £807,000 (2012: £159,000) is payable for the year and the whole of this amount (2012: £159,000) 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 Schroders Group, at any time during the year.

8. Status of announcement

2012 Financial Information

The figures and financial information for 2012 are extracted from the published Annual Report and Accounts for the year ended 30 September 2012 and do not constitute the statutory accounts for that year. The 2012 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.

2013 Financial Information

The figures and financial information for 2013 are extracted from the Annual Report and Accounts for the year ended 30 September 2013 and do not constitute the statutory accounts for the year. The 2013 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 2013 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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