Annual Financial Report

RNS Number : 7508K

Schroder UK Mid Cap Fund PLC

18 December 2018

 

                                                                                                                        18 December 2018

ANNUAL REPORT AND ACCOUNTS

Schroder UK Mid Cap Fund plc (the "Company") hereby submits its Annual Report for the year ended 30 September 2018 as required by the UK Listing Authority's Disclosure Guidance and Transparency Rule 4.1. 

The Company's Annual Report and Accounts for the year ended 30 September 2018 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website https://www.schroders.co.uk/ukmidcap.  Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/7508K_1-2018-12-17.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.morningstar.co.uk/uk/NSM.

Enquiries:

Benjamin Hanley

Schroder Investment Management Limited                      

Tel: [phone]

Chairman's Statement

Performance

It is disappointing that performance for the year ended 30 September 2018 was more muted than the prior year due in part to mid cap shares not being in favour with investors. However, the Company's long-term performance record remains strong. The Benchmark delivered a total return of 4.2%. The Company's NAV produced a total return of 3.5% and share price total return of 5.0%.

The Manager's Review provides greater detail on performance, market background and investment outlook for the Company.

Revenue and dividends

Revenue return per share increased by 20.2% (2017: 13.2%), largely due to strong cash flows by investee companies and highlighting one of the key tenets of the Manager's investment selection process. As a result of this and in line with the Company's policy of paying out substantially all of its revenue, the directors recommend the payment of a final dividend of 12.7 pence per share for the year ended 30 September 2018.

The proposed final dividend, combined with the interim dividend of 3.3 pence per share paid during the year, brings total dividends for the year to 16.0 pence per share, an increase of 22.1% over dividends declared in respect of the previous financial year.

A resolution approving the payment of the final dividend for the year ended 30 September 2018 will be proposed at the forthcoming Annual General Meeting ("AGM"). If the resolution is passed, the dividend will be paid on 1 February 2019 to shareholders on the register on 4 January 2019.

Management fees and ongoing charges

I am pleased to report that the board has negotiated a reduction in the Company's management fee from 0.7% per annum to 0.65% per annum on the first £250m and 0.6% on any amounts in excess of that, backdated to November 30th.  As currently, this will be based on the value of assets under management, net of current liabilities other than short-term borrowing, provided that if there are any short-term borrowings the value of cash up to the level of such borrowings is deducted from the calculation of assets.

Investment policy

As part of its ongoing review, the Board has examined the Company's investment policy and has decided to amend it, albeit not materially, to provide a clearer understanding for investors:

"Investment policy

The Manager has adopted a unique and consistent investment process, taking a stock specific approach with an emphasis on dynamic growth companies. Sector weightings play a secondary role, resulting naturally from stock selection. Fundamental research and engagement with investee companies forms the basis of each investment decision taken by the Manager.

The Company will predominantly invest in companies from the FTSE 250 Index, but may hold up to 20% of its portfolio in equities and collective investment vehicles outside the benchmark index.

The Company has the ability to use gearing for investment purposes up to 25% of total assets."

Gearing facility

During the year, the Company renewed its £15 million revolving credit facility with Scotiabank Europe Plc. At the beginning of the year the Company held net cash of 0.5%. The Manager made tactical use of the facility during the year, drawing down up to the limit to exploit investment opportunities, thereby boosting returns for shareholders and repaying the facility upon realising investments. At the year end the Company held net cash of 3.0% and since then the Manager has started to use the credit facility again, to take advantage of October's fall in share prices. The gearing at the date of this report is 4.2%. Parameters for the use of gearing are reviewed regularly by the board.

Share buy backs and discount management

The Company's share price discount to NAV per share, while still wider than the board would prefer, continued to narrow slightly during the year, falling to 16.0% at the year end. The average discount for the year was 15.7% and it ranged between 13.1% and 18.7%. The board monitored the discount throughout the year and received input from the Company's broker and the Manager.

Your board believes that the best way to close the share price discount is to increase demand for the Company's shares using effective marketing, and a continuation of the Company's strong longer-term performance. In the meantime, the board will continue to consider on a regular basis whether purchases of the Company's shares should be made, alongside other means of discount control. To provide maximum flexibility for the future, it is proposed that the existing authority to buy back up to 14.99% of its share capital be renewed at the forthcoming AGM. Any shares so purchased would be cancelled or held in treasury for potential reissue.

Board succession

The board undertook its annual review of board composition and, as part of the discussions, agreed that in order to ensure an orderly succession as part of its ongoing policy on refreshment, the nomination committee should begin reviewing new candidates for a non-executive director during 2019. This will result in a temporary increase in the size of the board.

Outlook

It is frustrating that UK mid-caps are not a popular investment at the moment. UK equities in general are out of favour, and mid caps particularly so. It has been reflected in a share price, after the fall in October, that has not made any progress since the start of 2016, and a discount to net asset value that is higher than we would like. This is despite most companies in the portfolio doing just what we want: to take one measure, the Company's income from investments - essentially the dividends they pay the Company - is up by more than a sixth on last year, after the 11% rise the year before.

The standard explanation for the asset class's unpopularity, of course, is Brexit: the uncertainty of the negotiations, and the fear that domestic UK businesses will face a more difficult environment. It is still too early to see where the negotiations will end, but if our Manager can find the right companies we know that there will be as many opportunities in mid caps in the future as there have been in the past. Long-term shareholders in the Company will know that it has been the best performing UK equity investment trust since the Manager took over responsibility in 2003.

Annual General Meeting

The Company's Annual General Meeting will be held at 12.00 noon on Thursday, 24 January 2019 and shareholders are encouraged to attend. The meeting will be held at the Manager's new office at 1 London Wall Place, EC2Y 5AU, London and will include a presentation by the Manager on the prospects for the UK market and the Company's investment strategy.

Eric Sanderson

Chairman

17 December 2018

Manager's Review

The broad UK market, as represented by the FTSE All-Share Index, returned 5.9% over the period (source: Schroders), as the world economy continued to grow at a steady pace. Despite this, tightening global monetary conditions intermittently dampened demand for equities, as did deteriorating US-China trade relations.

The "Goldilocks" scenario of low and stable growth and inflation was put to the test amid fears around the pace of policy tightening in the US. The Bank of England increased rates by 0.5%. Sterling was volatile amid political noise related to the Brexit negotiations, and the same uncertainty weighed on the shares of many UK domestic companies. This held back mid caps - the FTSE 250 (ex investment companies) lagged the FTSE 100, with the indices recording gains of 4.2% and 6.1% respectively.

The gains were however offset by weakness after the financial year-end, with markets worldwide falling on fears over the outlook for growth. The NAV as at 11 December 2018 is 14.4% lower than at the end of September.

Portfolio performance

The NAV produced a total return of 3.5% in the financial year, whilst the Benchmark return was 4.2% (source: Schroders). Income from the holdings, an increasingly important part of sustainable returns in this part of the market, grew by 17.9%, on top of the 11.5% increase last year.

This increase may seem surprising in a section of the market being shunned by global investors, in the form of a persistent underweight to the UK and in particular to domestically focused stocks. Many of these have demonstrated good growth underpinned by solid balance sheets, for example house builder Redrow and homewares retailer Dunelm (both in our "opportunistic ideas" basket). On the other hand, mid caps include a rich set of opportunities outside domestically focused stocks, since around half of their revenue is generated internationally, so it is possible to construct a "best of both" portfolio.

Travel food and beverage company SSP was the top contributor. It is a good example of one of the high quality "long term growth opportunity" stocks which make up the majority of the portfolio, benefiting from structural growth in air travel, led by a proven management team. SSP has maintained its strong performance, particularly in the growth market of international airport catering where it continued to win new contracts whilst retaining tight control of costs.

Another long-term growth opportunity stock, and disruptor, is home emergency services group HomeServe. This delivered robust full-year results and a positive AGM statement. Another example is Diploma, a supplier of specialist equipment to life sciences companies, was rewarded for its continued growth, which has been supplemented by well-received acquisitions.

The largest detractor relative to the index was food retailer Ocado, which was not held. While we recognise that it is a disruptor, it is not as profitable or cash flow positive as our other success story Rightmove, which was also promoted to the FTSE 100.

Although the portfolio benefited from exposure to some consumer stocks, this part of the market had  any detractors. The common theme for three of the five principal detractors was the unusual weather patterns, which gives us a degree of comfort that it should normalise.

The most significant detractor was online clothing retailer N Brown. Whilst downgrades have been small, the regulatory environment for the credit division has continued to harden.

Product sales have been disappointing, partly weather related and partly self-inflicted. On the positive side, the company has now closed all its stores and has, sensibly in our view, cut its dividend. A return to real wage inflation, together with a budget which should be beneficial to the typical N Brown customer, may now provide a helpful following wind. We trimmed the position, and await a new CEO before taking further action.

The portfolio was also negatively impacted by animal care retailer Pets at Home. We remain positive on its retail side: like-for-like sales growth is in mid single digits, something many other retailers are  struggling to deliver. The market is now questioning the highly profitable veterinary services business. The time the typical vet practice achieves breakeven has lengthened but we continue to see upside, with evidence that consumer spending on pets continues to grow. We see it as a "long-term growth opportunity".

Portfolio activity

Among the new holdings are precision control and measurement instrument manufacturer Spectris, where we see opportunities for new management to reshape its portfolio into a more specialist, higher margin group. A position was started in generic pharmaceuticals manufacturer Hikma which we perceived to be oversold and benefiting from new management. We also started a position in betting company William Hill: we think that the shares have overreacted to the reduction in maximum stakes on fixed odds betting terminals, and are not pricing in the opportunity now available in the US. We initiated a position in Eastern European airline Wizz Air, where we see growth prospects from an increase in business and leisure air travel and growing disposable income from a young Eastern European population.

Meanwhile we sold out of companies on valuation grounds or where developments meant the holding no longer fits our investment strategy. Our strategy of searching for the FTSE 100 Index companies of the future and investing in them during their strongest periods of performance was played out in Rightmove and Halma, as they were promoted to the FTSE 100 Index and duly sold. Property company Kennedy Wilson Europe, insurer esure and challenger bank Virgin Money were bid for. We exited Auto Trader due to concerns over the high margins the company generates whilst its customers are under pressure, and as we saw disruption from tech. Where positions had become very large and/or valuations stretched, we have trimmed holdings, for example in Dechra, Redrow and Renishaw.

Outlook

Due to the uncertainty around Brexit, many international investors remain nervous about investing in UK companies. In Bank of America Merrill Lynch's November survey the UK remains the most out-of-favour asset class, with allocations around 20-year lows. Accordingly, the valuation of the market continues to look attractive relative to other major markets.

Away from the Brexit headlines, the backdrop for the more domestically-focused part of the mid cap universe is far from dire, as reflected in the results by many of the holdings.  UK growth has strengthened, and the country's fiscal position is improving, allowing for a small fiscal stimulus in the Autumn Budget. Despite their depressed levels of confidence in the outlook, UK consumers are continuing to increase their spend on areas such as pet care and casual dining.  Furthermore, UK consumers should benefit from the increased basic tax rate threshold in the Budget, paired with real wage inflation.

As an illustration of the above, Restaurant Group recently reported positive like-for-like sales growth for the first time in two to three years. Restaurant Group has in six months created the UK's largest gourmet burger restaurant without creating a high street presence, delivering to customers' homes and supplying them from existing kitchens. As competition intensifies whilst bricks and mortar capacity comes out of the casual dining market, companies with strong management willing to embrace disruption can outperform. Restaurant Group also participates in another of our structural growth themes of airline travel, being the number one UK airport F&B concession operator - ahead of even SSP, one of our most successful holdings.

As we see an ever-faster pace of disruption, nowhere is this more keenly felt than on the high street. Companies which are not carrying out the disruption or adapting to take account of it will be strongly disadvantaged. We see opportunities for management teams which are nimble and creative to take advantage of disruptive trends.

Our investment management strategy

This illustrates some of the thinking around our process of selecting dynamic, high-quality growth companies; those with organic growth, pricing power and strong management teams, with disruptive tendencies; complemented by opportunistic positions in strong companies - those which may be cyclical, in turnaround, in areas where capacity is coming out. We likewise look to avoid companies in structural decline, with too much debt to support their business model. Examples of the long-term growth opportunities mentioned here are HomeServe and SSP: examples of  "opportunistic ideas" investment are Restaurant Group (which also has some disruptive and rapid growth features) and Redrow.  We are always looking for the next mid cap disruptor, while looking to avoid exposure to the next industry to be disrupted.

The market has fallen sharply since September, and we are seeing opportunities at a stock level. We have therefore drawn down part of the loan facility, with the portfolio geared by 4.2% as at 11 December 2018.

We believe that the Company's holdings are well placed to continue to generate superior long-term returns. Many are enjoying a virtuous circle where a rising stream of earnings is underpinning progressive dividend policies and simultaneously supporting reinvestment into the business to drive future growth.

Schroder Investment Management Limited

17 December 2018

Principal risks and uncertainties

The board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the audit and risk committee on an ongoing basis. This system assists the board in determining the nature and extent of the risks it is willing to take in achieving the Company's strategic objectives. Both the principal risks and the monitoring system are also subject to robust review at least annually. The last review took place in September 2018.

Although the board believes that it has a robust framework of internal control in place this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate, risk.

The principal risks and uncertainties faced by the Company have remained unchanged throughout the year under review. Cyber risk relating to all of the Company's key service providers is considered an ongoing threat in light of the rising propensity and impact of cyber attacks on businesses and institutions. To address the risk, the board receives enhanced reporting on cyber risk mitigation and management from its key service providers to ensure that it is managed and mitigated appropriately.

Actions taken by the board and, where appropriate, its committees, to manage and mitigate the Company's principal risks and uncertainties are set out in the table below.

Risk	Mitigation and management
Strategic The Company's investment objectives may become out of line with the requirements of investors, resulting in a wide discount of the share price to underlying NAV per share.	The appropriateness of the Company's investment remit is periodically reviewed and the success of the Company in meeting its stated objectives is monitored. The share price relative to NAV per share is monitored and the use of buy back authorities is considered on a regular basis. The marketing and distribution activity is actively reviewed. Proactive engagement with investors.
The Company's cost base could become uncompetitive, particularly in light of open ended alternatives.	The ongoing competitiveness of all service provider fees is subject to periodic benchmarking against their competitors. Annual consideration of management fee levels is undertaken.
Investment management The Manager's investment strategy, if inappropriate, may result in the Company underperforming the market and/or peer group companies, leading to the Company and its objectives becoming unattractive to investors.	The review of: the Manager's compliance with its agreed investment restrictions, investment performance and risk against investment objectives and strategy; relative performance; the portfolio's risk profile; and whether appropriate strategies are employed to mitigate any negative impact of substantial changes in markets. Annual review of the ongoing suitability of the Manager is undertaken.
Financial The Company is exposed to the effect of market fluctuations due to the nature of its business. A significant fall in equity markets could have an adverse impact on the market value of the Company's underlying investments.	The risk profile of the portfolio is considered and appropriate strategies to mitigate any negative impact of substantial changes in markets are discussed with the Manager.
Custody Safe custody of the Company's assets may be compromised through control failures by the depositary, including cyber hacking.	The depositary reports on the safe custody of the Company's assets, including cash and portfolio holdings which are independently reconciled with the Manager's records. The review of audited internal controls reports covering custodial arrangements is undertaken. An annual report from the depositary on its activities, including matters arising from custody operations is received.
Gearing and leverage The Company utilises credit facilities. These arrangements increase the funds available for investment through borrowing. While this has the potential to enhance investment returns in rising markets, in falling markets the impact could be detrimental to performance.	Gearing is monitored and strict restrictions on borrowings are imposed: gearing continues to operate within pre-agreed limits so as not to exceed 25% of total assets.
Accounting, legal and regulatory 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. Breaches of the UK Listing Rules, the Companies Act or other regulations with which the Company is required to comply, could lead to a number of detrimental outcomes.	The confirmation of compliance with relevant laws and regulations by key service providers is reviewed. Shareholder documents and announcements, including the Company's published Annual Report are subject to stringent review processes. Procedures are established to safeguard against the disclosure of inside information.
Service provider The Company has no employees and has delegated certain functions to a number of service providers. Failure of controls, including as a result of cyber hacking, and poor performance of any service provider, could lead to disruption, reputational damage or loss.	Service providers are appointed subject to due diligence processes and with clearly-documented contractual arrangements detailing service expectations. Regular reports are provided by key service providers and the quality of their services are monitored. Review of annual audited internal controls reports from key service providers, including confirmation of business continuity arrangements and IT controls is undertaken.

Risk assessment and internal controls

Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the Audit and Risk Committee, including the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Company's performance or condition. No significant control failings or weaknesses were identified from the Audit and Risk Committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this Report.

A full analysis of the financial risks facing the Company is set out in note 19 on pages 42 to 46 of the 2018 Annual Report.

Viability statement

The directors have assessed the viability of the Company over a five year period to 30 September 2023, taking into account the Company's position at 30 September 2018 and the potential impacts of the principal risks and uncertainties it faces for the review period.

A period of five years has been chosen as the board believes that this reflects a suitable time horizon for strategic planning, taking into account the investment policy, liquidity of investments, potential impact of economic cycles, nature of operating costs, dividends and availability of funding.

In its assessment of the viability of the Company, the directors have considered each of the Company's principal risks and uncertainties detailed on pages 14 and 15 of the 2018 Annual Report and in particular the impact of a significant fall in UK equity markets on the value of the Company's investment portfolio. The directors have also considered the Company's income and expenditure projections and the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary and on that basis consider that five years is an appropriate time period.

Based on the Company's processes for monitoring operating costs, the board's view that the Manager has the appropriate depth and quality of resource to achieve superior returns in the longer term, the portfolio risk profile, limits imposed on gearing, counterparty exposure, liquidity risk and financial controls, the directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of their assessment.

Going concern

Having assessed the principal risks and the other matters discussed in connection with the viability  statement set out above, and the "Guidance on Risk Management, Internal Control and Related Financial and Business Reporting" published by the Financial Reporting Council ("FRC") in 2014, the directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Statement of Directors' Responsibilities in respect of the Annual Report and Accounts

The directors are responsible for preparing the annual report and accounts in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law they are required to prepare the financial statements in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these financial statements, the directors are required to:

•        select suitable accounting policies and then apply them consistently;

•        make judgements and estimates that are reasonable and prudent;

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

•        assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

•        use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

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 its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

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

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement of the directors in respect of the annual report and accounts

We confirm that to the best of our knowledge:

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

•        the strategic report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.

We consider 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 position and performance, business model and strategy.

Income Statement    

for the year ended 30 September 2018

	2018			2017
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair value
through profit or loss	-	1,607	1,607	-	35,316	35,316
Income from investments	6,997	1,459	8,456	5,933	274	6,207
Other interest receivable and similar income	7	-	7	-	-	-
Gross return	7,004	3,066	10,070	5,933	35,590	41,523
Investment management fee	(485)	(1,133)	(1,618)	(442)	(1,030)	(1,472)
Administrative expenses	(482)	-	(482)	(457)	-	(457)
Net return before finance costs and taxation	6,037	1,933	7,970	5,034	34,560	39,594
Finance costs	(10)	(23)	(33)	(3)	(6)	(9)
Net return on ordinary activities before taxation	6,027	1,910	7,937	5,031	34,554	39,585
Taxation on ordinary activities	(12)	-	(12)	-	-	-
Net return on ordinary activities after taxation	6,015	1,910	7,925	5,031	34,554	39,585
Return per share	16.78p	5.33p	22.11p	13.96p	95.87p	109.83p

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 Company has no other items of other comprehensive income, and therefore the net return on ordinary activities after taxation is also the total comprehensive income for the year.

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

Statement of Changes in Equity

for the year ended 30 September 2018

	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 2016	9,036	13,971	220	2,184	15,477	145,723	6,107	192,718
Net return on ordinary activities	-	-	-	-	-	34,554	5,031	39,585
Repurchase of the Company's own shares into treasury	-	-	-	-	(1,543)	-	-	(1,543)
Dividends paid in the year	-	-	-	-	-	-	(4,183)	(4,183)
At 30 September 2017	9,036	13,971	220	2,184	13,934	180,277	6,955	226,577
Net return on ordinary activities	-	-	-	-	-	1,910	6,015	7,925
Dividends paid in the year	-	-	-	-	-	-	(4,768)	(4,768)
At 30 September 2018	9,036	13,971	220	2,184	13,934	182,187	8,202	229,734

Statement of Financial Position

at 30 September 2018

	2018	2017
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	221,691	225,659
Current assets
Debtors	1,796	1,063
Cash at bank and in hand	6,781	1,020
	8,577	2,083
Current liabilities
Creditors: amounts falling due within one year	(534)	(1,165)
Net current assets	8,043	918
Net assets	229,734	226,577
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	13,934	13,934
Capital reserves	182,187	180,277
Revenue reserve	8,202	6,955
Total equity shareholders' funds	229,734	226,577
Net asset value per share	640.80p	631.99p

These accounts were approved and authorised for issue by the board of directors on 17 December 2018 and signed on its behalf by:

Eric Sanderson

Chairman

Notes to the Accounts

1.   Accounting policies

Basis of accounting

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in particular in accordance with Financial Reporting Standard ("FRS") 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", 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 November 2014 and updated in February 2018. All of the Company's operations are of a continuing nature.

The Company has not presented a statement of cash flows, as it is not required for an investment trust which meets certain conditions.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments held at fair value through profit or loss.

The accounts are presented in sterling and amounts have been rounded to the nearest thousand.

The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 30 September 2017.

No significant judgements, estimates or assumptions have been required in the preparation of the accounts for the current or preceding financial years.

2. Taxation

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. Taxation on ordinary activities comprises irrecoverable overseas withholding tax. Please refer to Note 7 on page 39 of the 2018 Annual Report.

3.         Dividends

(a)        Dividends paid and declared

	2018 £'000	2017 £'000
2017 final dividend of 10.00p (2016: 8.50p) paid out of revenue profits	3,585	3,072
Interim dividend of 3.30p (2017: 3.10p) paid out of revenue profits	1,183	1,111
Total dividends paid in the year	4,768	4,183

	2018 £'000	2017 £'000
2018 final dividend declared of 12.70p (2017: 10.00p) to be paid out of revenue profits	4,553	3,585

(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 £6,015,000 (2017: £5,031,000).

	2018 £'000	2017 £'000
Interim dividend of 3.30p (2017: 3.10p)	1,183	1,111
Final dividend of 12.70p (2017: 10.00p)	4,553	3,585
	5,736	4,696

4.         Return per share

	2018 £'000	2017 £'000
Revenue return	6,015	5,031
Capital return	1,910	34,554
Total return	7,925	39,585
Weighted average number of shares in issue during the year	35,851,190	36,043,409
Revenue return per share	16.78p	13.96p
Capital return per share	5.33p	95.87p
Total return per share	22.11p	109.83p

5.         Called-up share capital

	2018	2017
	£'000	£'000
Ordinary shares allotted, called-up and fully paid:
Opening balance of 35,851,190 (2017: 36,143,690) shares of 25p each:	8,963	9,036
Repurchase of nil (2017: 292,500) shares into treasury	-	(73)
Subtotal of 35,851,190 (2017: 35,851,190) shares	8,963	8,963
292,500 (2017: 292,500) shares held in treasury	73	73
Closing balance1	9,036	9,036

¹Represents 36,143,690 (2017: 36,143,690) shares of 25p each, including 292,500 (2017: 292,500) shares held in treasury.

6.         Net asset value per share

	2018	2017
Net assets attributable to the Ordinary shareholders (£'000)	229,734	226,577
Shares in issue at the year end	35,851,190	35,851,190
Net asset value per share	640.80p	631.99p

7.         Disclosures regarding financial instruments measured at fair value

The Company's financial instruments within the scope of FRS 102 that are held at fair value comprise its investment portfolio.

FRS 102 requires that financial instruments held at fair value are categorised into a hierarchy consisting of the three levels

below. A fair value measurement is categorised in its entirety on the basis of the lowest level input that is significant to the fair value measurement.

Level 1: valued using unadjusted quoted prices in an active market for identical assets.

Level 2: valued using inputs other than quoted prices included within Level 1, that are observable (ie developed using market data).

Level 3: valued using inputs that are unobservable (ie for which market data is unavailable).

Details of the valuation techniques used by the Company are given in note 1(b) on page 36 of the 2018 Annual Report.

At 30 September 2018, the Company's investments were all categorised in Level 1 (2017: same).

8.         Status of announcement

2017 Financial Information

The figures and financial information for 2017 are extracted from the published Annual Report and Accounts for the year ended 30 September 2017 and do not constitute the statutory accounts for that year. The 2017 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.

2018 Financial Information

The figures and financial information for 2018 are extracted from the Annual Report and Accounts for the year ended 30 September 2018 and do not constitute the statutory accounts for the year. The 2018 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 2018 Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

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

 

END

 

 

FR EAPAXFLDPFFF