Annual Financial Report

RNS Number : 2433J

Schroder UK Mid Cap Fund PLC

21 December 2020

 

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 2020, as required by the Financial Conduct Authority's Disclosure Guidance and Transparency Rule 4.1. 

The Company's Annual Report and Accounts for the year ended 30 September 2020 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's webpages  www.schroders.co.uk/ukmidcap . Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/2433J_1-2020-12-18.pdf

The Company has submitted its annual report and accounts to the National Storage Mechanism and it will shortly be available for inspection at  https://data.fca.org.uk/#/nsm/nationalstoragemechanism .  

Enquiries:

Gareth Faith

Schroder Investment Management Limited

Tel: [phone]

________________________________________________________________________________________________________________________

Chairman's Statement

Performance

Markets around the world fell as a result of the COVID-19 pandemic. The NAV produced a total return over the financial year  of -7.7% and the share price total return was -12.5%. Both were better than the Benchmark's -15.3%, and the long-term performance record remains strong, with both 10 year NAV and share price annualised total returns in excess of 10%, again outperforming the Benchmark. It has been a challenging 12 months for the Company as it has been for all companies in our sector and across most sectors, mainly because of the COVID-19 pandemic. Since the year end a vaccine has started to be rolled out and markets have responded positively to this. Our NAV has increased by 13.8% at the date of writing and our share price by 35.7% compared with a benchmark return of 19.6%.

Revenue and dividend

The impact of the lockdowns was most apparent on dividends received from the portfolio holdings, with many being cut partially or completely. Revenue return per share decreased by 56.3%. However, we have decided to use some of our revenue reserves, built up in past years, to partially fund this year's dividend. Accordingly, the directors recommend a final dividend of 9.5p per share. This together with the interim dividend already declared will involve a transfer from revenue reserves of £1,520,000. The proposed final dividend, combined with the interim dividend of 3.8p per share paid during the year, brings total dividends for the year to 13.3p per share, a decrease of 28.1% in dividends declared in respect of the previous financial year. At the current share price of 622p (as at 17 December 2020) this represents a yield of 2.1%.

The Board felt that it was important that the level of dividend being declared this year was set at a realistic and sustainable level. While the outlook for dividend income from UK companies next year is uncertain, it is expected to improve from this year's depressed levels. On the basis of current forecasts, the Board therefore expects the current level of dividend to be maintained next year.

A resolution to approve the payment of the final dividend for the year ended 30 September 2020 will be proposed at the forthcoming Annual General Meeting ("AGM"). If the resolution is passed, the dividend will be paid on 15 February 2021 to shareholders on the register on 15 January 2021.

Portfolio management arrangements

For the last four years Andy Brough has been the portfolio's lead manager with Jean Roche as co-manager. Following discussions with Schroders, after the AGM this will be reversed: Jean will be the lead manager, and Andy the co-manager.

The Board has been impressed with Jean's contribution since she joined Schroders in 2016, so is delighted to see Jean become the lead manager. Equally, a major part of the Company's successful long-term record has been due to Andy from the first day Schroders became manager in 2003, so we are very pleased that he will  continue to work alongside Jean as co-manager. Further detail on how the portfolio is being managed is provided in the Strategic Review.

Investment policy

The Board, in consultation with the Manager and the Company's advisers, has agreed non-material changes to the Company's investment policy which seek to better describe the Manager's investment process rather than change any of the parameters of the policy. Shareholder approval is not being sought for these changes. The re-stated investment policy is set out on the inside front cover of the Annual Report and Accounts and details of the changes can be found below.

Gearing

The Company's £25 million revolving credit facility with Scotiabank Europe plc was converted into a three year term loan on 12 February 2020. The term loan provides a low cost of debt and the extension of the maturity from July 2020 to February 2023 reduces the Company's refinancing risk. At the year end the net gearing was 5.3% (2019: 4.3%). The Manager will continue to use this gearing to take advantage of investment opportunities and to participate in capital raisings by portfolio companies.

Discount management

In common with other companies in our sector the Company's share price discount to NAV per share widened during the year. The average discount for the year was 13.5% and it ranged between a 23.4% discount and a 0.8% premium. The Board monitored the discount throughout the year and received input from the Company's broker and the Manager on a frequent basis.

Your Board believes that the best way to close the discount on a long-term basis is by increasing demand for the Company's shares through a continuation of the Company's strong longer-term performance and by marketing this performance effectively. In addition, the Board commenced a series of share buybacks on 4 August 2020 when the share price discount to NAV was 15.7% and 295,000 shares have been repurchased since then. These buybacks have been accretive to remaining shareholders and have provided additional useful liquidity.

Following the rally after news of a vaccine against COVID-19 was announced, the share price discount to NAV has significantly narrowed, suggesting that the discount had been driven by sentiment about the UK mid cap sector's recovery from the effect of the pandemic. Whilst this narrowing of the discount is welcome, the Board continues to monitor actively the discount levels and intends to continue to use buybacks as appropriate.

At the Company's last AGM, the Company was given the authority to purchase up to 14.99% of its issued share capital. We propose that share buyback authorities be renewed at the forthcoming AGM and that any shares so purchased be cancelled or held in treasury for potential reissue at a premium to NAV.

Annual General Meeting

The Company's AGM will be held at 12.00 noon on Monday, 8 February 2021.

We have had to change the way in which we operate and since March all Board meetings have been held virtually with frequent additional meetings with the managers between formal board meetings.

The government's current relaxation of the statutory provisions relating to AGMs in the Companies Act 2006 are expected to end on 30 March 2021. The temporary relaxation allows companies to hold AGMs with a quorum not required to be in one location and this is the practice many companies have applied. Therefore, to ensure the safety and security of our shareholders, service providers, officers and guests, we have decided to hold a closed doors meeting with only the minimum number of directors and shareholders required to form a quorum. Shareholders are therefore asked not to attend the AGM in person but instead to vote by proxy. Should the advice of the government and Public Health England which limits travel and places limits on public gatherings change, the Board will consider notifying shareholders that they are able to attend the AGM. This notification will be placed on the Company's webpages. In the meantime, we hope all of our shareholders remain safe.

The Board is keen to engage with the Company's shareholders despite having different arrangements in place for the AGM. The Board will therefore be providing answers to commonly asked questions on the Company's webpages www.schroders.co.uk/ukmidcap, as well as the answers to questions from shareholders which have been submitted before the AGM. To email, please use: [e-mail] or write to us at Company Secretary, Schroder UK Mid Cap Fund plc, 1 London Wall Place, London EC2Y 5AU. Please submit any questions by 25 January 2021.

The Manager will be presenting a webinar on Monday, 8 February 2021 at 12.15pm, and all shareholders are encouraged to sign up to hear the fund managers' view. To sign up please visit https://www.schroders.com/en/uk/private-investor/fund-centre/funds-in-focus/investment-trusts/schroders-investment-trusts/schroder-uk-mid-cap-fund/commentary/.

Board succession

As stated in my Chairman's Statement last year, the Board has determined a policy for Board and Chairman succession. All members of the Board, including the Chairman, will normally retire no later than the AGM following the 9th anniversary of joining the board (although this can vary to take account of specific circumstances, for example, to avoid two directors retiring at the same time). In accordance with this policy, I shall retire from the Board following the 2021 AGM and Robert Talbut shall succeed me as Chairman of the board. I would like to take this opportunity to thank my colleagues on the Board and our managers for the support they have given me throughout my tenure of office and to wish them every success in future. I would also like to thank Jan Kingzett for his support over the years. Jan is the client relations director at Schroders who attends all of our meetings and retires at the end of December.

Conclusion

I look back on my time with the Company with great affection. It is not just that the share price and the dividend has more than doubled since I joined the Board  in 2011, but also that it has happened while the broader market has struggled, with the FTSE All-Share up less than a fifth. The Company remains the best performing UK equity investment trust since Schroders became manager in 2003, confirming the opportunities in the UK's mid cap economy as well as the virtue of actively-managed stock selection. I take particular pleasure from the number of holdings that graduated to the FTSE 100 Index. The Manager sold them when that happened for all the right reasons: the portfolio had made substantial returns from them, and the time had come to move on to what we hope are the successes of tomorrow.

The last year has tested many of the holdings, and it is encouraging how most have reacted.  I hand over to  Robert with great optimism for the future.

Eric Sanderson

Chairman

18 December 2020

Manager's Review

We target a high conviction portfolio of resilient companies that are all capable of delivering high risk-adjusted returns with rising cash flows and earnings. These returns can come from disruptors, which challenge the status quo within the marketplace, or from established companies which can grow sustainably as they reinvent themselves in response to the disruption. Resilience comes from strong finances, leading ESG/sustainability practices and clear strategic direction. This is expanded upon in the Strategic Review.

Market Background

The FTSE 250 ex Investment Trusts Index fell 15.3% over the period, outperforming the 18.1% decline in the FTSE 100 (source: Morningstar, Schroders). The pandemic caused an accelerated sell-off in global markets in the second half of the period. Equities fell sharply as efforts to deal with the virus, including widespread lockdowns, hit economic activity indiscriminately and simultaneously in all regions of the world. Markets retraced some of their losses towards the end of the period as central banks and governments moved quickly to support the global economy with significant levels of monetary and fiscal stimulus.

Prior to these events, domestic politics had dominated UK assets. The UK general election brought a landslide victory for the Conservative Party which took the UK out of the EU on 31 January 2020, beginning the next stage of negotiations. UK equities had performed relatively well up until COVID-19, especially domestically-focused areas amid a recovery in UK economic activity. As a result, UK mid-caps outperformed larger companies' shares over the period as a whole. Towards the end of the period there was evidence of a further solid recovery in the UK economy. It is possible that the recovery seen in many areas of the economy reflects some success in the government's targeted measures to protect jobs and incomes.

Portfolio Performance

One consequence of the pandemic was that dividends from the portfolio's holdings halved. The NAV also fell sharply, but regained some of its losses to end the year with a total return of -7.7% (source Schroders). This outperformed the benchmark by 7.6% due to stock selection, with gearing having a small negative effect. There was huge volatility in markets, with the quantum of the stock moves particularly striking: three of the top five contributors, for example, outperformed by 99% or more. Although the environment was patently different to the previous year's, the top two positive contributors were again, remarkably, two domestic retailers, Dunelm and Pets at Home.

Certain secular trends, for example the shift towards online retail and more frequent working from home, have accelerated as a result of the pandemic, and this has been reflected in the portfolio's outperformance. We wrote about this in September in "The homebody economy - investing in your digital back yard"¹. Homewares retailer Dunelm confirmed the degree to which its new digital platform outperformed in April, May and June when online sales more than doubled year-on-year, well ahead of the performance of many native online retailers. Petcare specialist Pets at Home reported resilient trading since the start of its financial year, which coincided with the UK lockdown. It was helped by the surge in demand for pets following the shift to working from home, while essential retailer status meant stores could remain open. Again, a strong omnichannel offer thanks to previous investment proved its value.

A new entrant to the top contributors was miniatures crafting and table-top war games business Games Workshop, a holding added in the previous financial year. Despite COVID-19 impacting operations for the final two months of its financial year, the company confirmed a fourth year of record constant currency sales, profits and cash generation, with the commentary "Wow, what a year." We see good ongoing potential as the company selectively licenses its intellectual property to create many new products across a wide range of new media towards becoming a truly global franchise.

Technology equipment and services business Computacenter was another strong contributor, as enterprises accelerated their digital transformations in response to the pandemic. Companies have found that, if their employees are to work together seamlessly from multiple locations, digital services and technology spend must not be held back. The company had already been benefiting from this trend, and COVID-19 has been the wind behind the sails of multiple upgrades, particularly in the second half of the Company's financial year.

Shares in Diploma, a supplier of essential, niche products and services to life sciences and industrials businesses, responded particularly well to its acquisition of a cable and wire distributor in the US. The acquisition was funded partly by cash and partly via a 10% equity raise, and the group now benefits from a strengthened balance sheet and access into high growth markets via the acquisition, such as audio/visual/voice, building automation (eco friendly smart buildings), and fire security.

Niche marine services business James Fisher was a significant detractor due to oil price weakness and COVID-19-related project delays and cancellations in its Marine Services division. We view news of a strategic review, now due to take place in early 2021, as a potential positive catalyst, particularly as it is likely to result in a less geared balance sheet. In the meantime, the company has adequate financial headroom.

Petrofac has appeared once more as a detractor of note, also affected by weakness in the Oil and Gas market and a Serious Fraud Office investigation which has not yet come to a conclusion. The company's long-standing CEO is due to step down at the end of the year and his replacement also has a strong background in the important Middle Eastern market, which is reassuring.

Housebuilder Crest Nicholson and casual dining specialist Restaurant Group were among the larger detractors as lockdown measures essentially brought these businesses to a standstill. More recently, however, there have been strong results from UK housebuilders as the importance of where one lives (and now, increasingly, works), has seemingly taken centre stage in the mind of the UK consumer. This was helped by initiatives such as the Stamp Duty holiday on the first £500,000 of all property sales, meaning a saving of up to £15,000 for some buyers. As to Restaurant Group, the casual dining industry has seen announcements of up to 30% of capacity exiting the market, which bodes well for the survivors, but it may require further patience to see this play out to the advantage of Restaurant Group. In the meantime, we note the continued market-beating performances of Wagamama and the Pubs businesses within Restaurant Group.

Turning to stocks not owned, one of the largest detractors was not owning water utility and waste management company Pennon, which, at the height of the market sell-off, agreed to a bid approach for its waste recycling business Viridor. Not holding retailer B&M also negatively impacted performance. Instead, we have focused on specialist retailers where we have better data on individual category spend.

Not owning highly-indebted Tullow Oil was a positive, as was a zero weighting in software company Micro Focus, which continues to struggle to digest its most recent acquisition.

Portfolio activity

The most notable change this year has been the reduction in the number of holdings from 61 to 54, as we work towards our new target of 40-50. We disposed of some of the smaller positions, reinvesting the proceeds in holdings in which we have stronger conviction such as world class nanotechnology company Oxford Instruments and global no. 1 heat treatment specialist Bodycote.

A notable disposal due to a change in structural drivers was travel food and beverage group SSP. We supported the company's capital raise during the early onset of the pandemic, but when there was an opportunity to dispose of the shares at a premium to this price, we took it, as we no longer saw a clear and sustainable path to growth. We exited home emergency services company HomeServe ahead of its promotion to the FTSE 100 in line with our stated policy. We had been taking profits prior to this, as we believed that its growth opportunities had begun to be more than fairly reflected in the share price. We also exited the holding in private debt, equity and credit specialist Intermediate Capital Group on its promotion to the FTSE 100.

New holdings included drinks manufacturer A.G. Barr, whose ready-to-drink nitro-infused cocktails are a potentially exciting growth area. We also added Gamesys. It is exposed to a structurally growing market (online gaming, mainly bingo and casino games), which has been given a further boost by the pandemic, and this is not reflected in its valuation. We established a new holding in pig and cow genetics company Genus where we see good opportunities from its gene editing technology. Having been used to breed virus-resistant pigs (resistant to Porcine Reproductive and Respiratory Syndrome virus, one of the most economically destructive pig viruses in existence), the company is in the process of bringing the technology to market via an FDA approval process. We also established a new position in early-stage investor IP Group at a 45% discount to NAV. Its investments offer exposure to many promising new technologies, collaborating with some of the UK's leading universities to help commercialise their ideas, and has stakes in several ventures spun out of these institutions. This includes Oxford Nanopore whose technology is being used to sequence DNA. More immediately, its 90-minute COVID-19 test technology has the potential to be a game changer.

Outlook

Looking back over the last year, the only thing we can say with certainty is "well, nobody expected that." This has been a year of significant highs and lows, of human tragedy, volatility, of economics battling life sciences and of emotions running high. At the time of writing, two announcements on stage 3 trials of COVID-19 vaccines have driven a recovery in many of the shares sold off aggressively at the start of the pandemic. The US is preparing to welcome a new president, and Brexit deliberations are moving at an accelerated pace, as is news flow on incoming UK M&A. We are not trying to second guess any of this: instead, we are focusing on making sure that we hold shares in companies which are either disruptors, changing the status quo within the marketplace, or established companies which can grow sustainably as they reinvent themselves in response to the disruption, companies which we refer to as long-term growth opportunity stocks. Neither do we target a specific level of gearing: future levels of gearing will be a function of the opportunities we see in the market.

In the first few months of the pandemic, we were asked what new trends were emerging and if they would change our investment approach. This led us to examine our core long-term growth opportunity stocks, and whether we believed that the opportunities we saw previously would persist in a post COVID-19 world. Trends which we observed early on do seem to be becoming established. The shift from store-based to online retail and more frequent working from home have accelerated, and been reflected in strong trading reported by Pets at Home, Computacenter and Dunelm as well as holdings such as multi-utility provider Telecom Plus, Games Workshop and self-storage specialist Safestore. Though many of these stocks have been coronavirus beneficiaries, we see them as able to continue to deliver sustainable growth post pandemic.

News that the UK economy grew by 15.5% in Q3 has been dismissed by some commentators as merely the product of pent-up demand, but salaries are also, now, higher than they were in Q4 2019, which shows that fiscal transfers are supporting income (albeit at a cost). This in turn should support a strong recovery once the current lockdown eases. We published an article capturing our thoughts on how a post pandemic UK consumer might behave ("What happens when the party starts back up?"²) as sometimes, in the middle of Lockdown 2, it is difficult to imagine ourselves back in a world where parties can be for more than six people, but it will happen.

More generally, it is reassuring that we have made few changes to our list of long-term growth opportunities. We mentioned SSP earlier, and recognise that the jury is out in the minds of some on serviced office company IWG, and this is understandable given the number of offices shut since March, but it misses the point on flexible office space where we see structural growth in demand. Otherwise, the pre-COVID-19 list is relatively intact.

We are realists, though. Although we anticipate a wobbly V-shaped recovery in terms of a rebound in GDP, we recognise that companies will continue to face headwinds caused by this most recent disruptive event. As stock pickers, it is our job to work out when the market is pricing this incorrectly.

We have said previously that economic turmoil could trigger progress, thinking of the post-World War II era, for example. Much has been written about the frustratingly low growth in UK plc's productivity. The one good thing to come out of this pandemic is that it has forced 'old economy' stocks to cast aside entrenched behaviours, achieving five years of change in six months. That can only be a good thing in the long term for the profitability of companies and the health of the economy. It is too early to tell, but it might also be the case that behaviour around distribution of earnings as dividends to shareholders might moderate, long term, with management teams seeking to increase investment to grow companies in preference to distribution.

In conclusion, with a cautiously optimistic eye on the UK economy, we continue to focus the portfolio on seeking out the next mid-cap disruptor, while looking to avoid exposure to the next industry to be disrupted.

1.  https://www.schroders.com/en/uk/asset-manager/insights/markets/the-homebody-economy--investing-in-your-digital-back-yard/  

2.  https://www.schroders.com/en/uk/adviser/insights/markets/what-happens-when-the-party-starts-back-up/  

Schroder Investment Management Limited

December 2020

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Investment policy

The Board, in consultation with the Manager and the Company's advisers, has agreed non-material changes to the Company's investment policy which seek to better describe the Manager's investment process rather than change any parameters of the policy. Shareholder approval is not being sought for these changes which are set out below.

New description of investment process

The Manager applies a high conviction approach, managing a focused portfolio of resilient companies that are all capable of delivering excess risk-adjusted returns with rising cash flows and earnings.

Previous description of investment process

The strategy is to invest principally in the investment universe associated with the benchmark index, but with an element of leeway in investment remit to allow for a conviction-driven approach and an emphasis on specific companies and targeted themes.

The Manager has adopted a unique and consistent investment process, taking a stock specific approach with an emphasis on growth companies. Sector weightings play a secondary role, resulting naturally from stock selection.

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 June 2020.

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.

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.

Emerging risks and uncertainties

During the year, the Board also discussed and monitored a number of risks that could potentially impact the Company's ability to meet its strategic objectives. These were political risk, climate change risk and the impact of the COVID-19 pandemic. The Board has determined that these risks are worthy of close monitoring, although they do not meet the threshold for inclusion as principal risks at this time. The Board receives updates from the Manager, Company Secretary and other service providers on other potential risks that could affect the Company.

Political risk includes Brexit, trade wars and regional tensions. The Board continues to monitor developments for the UK's departure from the European Union and to assess the potential consequences for the Company's future activities. The Board is also mindful that changes to public policy in the UK could impact the Company in the future.

Climate change risk includes how climate change could affect the Company's investments, and potentially shareholder returns. The Board notes that the Manager has integrated ESG considerations, including climate change, into the investment process. The Board will continue to monitor this.

The Board also reviewed the risks arising from the COVID-19 pandemic and how it impacted the Company's principal risks and uncertainties. The Board considers that the pandemic will likely continue to affect the Company with respect to investment management and service provider risks, due to the uncertainty caused by the pandemic, affecting the value of the Company's investments due to the disruption of supply chains and demand for products and services, increased costs and cash flow problems, and changed legal and regulatory requirements for companies. The Board notes the Manager's investment process is unaffected by the pandemic and it continues to focus on long-term company fundamentals and detailed analysis of current and future investments. As stated in the Chairman's Statement, the Company's income from portfolio companies decreased in 2020 as a result of the pandemic, leading to the use of revenue reserves to fund the final dividend payment. The longer term impacts of the pandemic remain unknown and the Board will continue to monitor its effects on the Company. COVID-19 also affected the Company's service providers, who implemented business continuity plans in line with government guidelines. All service providers continue to operate on a business as usual basis. In all other respects, the Company's principal risks and uncertainties have not materially changed since the date of the annual report and are not expected to change materially for the current financial year.

The "change" column below highlights at a glance the Board's assessment of any increases or decreases in risk during the year after mitigation and management. The arrows show the risks as increased or decreased, and dashes show risks as stable.

Risk	Mitigation and management	Change (post-mitigation and management)
Strategic The requirements of investors change or diverge in such a way as to diverge from the Company's investment objectives, 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. Marketing and distribution activity is actively reviewed. The Company engages proactively 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.	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. The Manager also reports on the impact of COVID-19 on the Company's portfolio, and the market generally. Annual review of the ongoing suitability of the Manager, including resources and key personnel risk.	-
Financial and market risk 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. See note 20 of the notes to the accounts.	-
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 is monitored. Review of annual audited internal controls reports from key service providers, including confirmation of business continuity arrangements and IT controls is undertaken.	-
Cyber The Company's service providers are all exposed to the risk of cyber attacks. Cyber attacks could lead to loss of personal or confidential information or disrupt operations.	Service providers report on cyber risk mitigation and management at least annually, which includes confirmation of business continuity capability in the event of a cyber attack. In addition, the Board received presentations from the Manager and the safekeeping agent and custodian on cyber risk, and the additional steps those companies were taking during the COVID-19 pandemic and the need for employees to work from home.	-

Risk assessment and internal controls review by the Board

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 20 to the accounts on pages 52 to 55 of the Annual Report and Accounts.

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

The Directors are responsible for preparing the Annual Report and financial statements 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 financial report

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.

On behalf of the board

Eric Sanderson

Chairman

18 December 2020

Income Statement

for the year ended 30 September 2020

		2020			2019
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Losses on investments held at fair value through profit or loss	-	(18,945)	(18,945)	-	(3,615)	(3,615)
Income from investments	4,155	-	4,155	8,260	615	8,875
Other interest receivable and similar income	4	-	4	9	-	9
Gross return/(loss)	4,159	(18,945)	(14,786)	8,269	(3,000)	5,269
Investment management fee	(402)	(939)	(1,341)	(442)	(1,032)	(1,474)
Administrative expenses	(516)	-	(516)	(476)	-	(476)
Net return/(loss) before finance costs and taxation	3,241	(19,884)	(16,643)	7,351	(4,032)	3,319
Finance costs	(86)	(200)	(286)	(39)	(91)	(130)
Net return/(loss) on ordinary activities before taxation	3,155	(20,084)	(16,929)	7,312	(4,123)	3,189
Taxation on ordinary activities	-	-	-	13	-	13
Net return/(loss) on ordinary activities after taxation	3,155	(20,084)	(16,929)	7,325	(4,123)	3,202
Return/(loss) per share	8.92p	(56.79)p	(47.87)p	20.43p	(11.50)p	8.93p

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 2020

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 2018	9,036	13,971	220	2,184	13,934	182,187	8,202	229,734
Repurchase of the Company's own shares into treasury	-	-	-	-	(597)	-	-	(597)
Net (loss)/return on ordinary activities	-	-	-	-	-	(4,123)	7,325	3,202
Dividends paid in the year	-	-	-	-	-	-	(5,915)	(5,915)
At 30 September 2019	9,036	13,971	220	2,184	13,337	178,064	9,612	226,424
Repurchase of the Company's own shares into treasury	-	-	-	-	(3,429)	-	-	(3,429)
Net (loss)/return on ordinary activities	-	-	-	-	-	(20,084)	3,155	(16,929)
Dividends paid in the year	-	-	-	-	-	-	(6,542)	(6,542)
At 30 September 2020	9,036	13,971	220	2,184	9,908	157,980	6,225	199,524

Statement of Financial Position

at 30 September 2020

	2020	2019
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	210,161	232,621
Current assets
Debtors	1,380	3,990
Cash at bank and in hand	14,504	356
	15,884	4,346
Current liabilities
Creditors: amounts falling due within one year	(1,521)	(10,543)
Net current assets/(liabilities)	14,363	(6,197)
Total assets less current liabilities	224,524	226,424
Creditors: amounts falling due after more than one year	(25,000)	-
Net assets	199,524	226,424
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	9,908	13,337
Capital reserves	157,980	178,064
Revenue reserve	6,225	9,612
Total equity shareholders' funds	199,524	226,424
Net asset value per share	568.99p	633.51p

These accounts were approved and authorised for issue by the Board on 18 December 2020 and signed on its behalf by:

Eric Sanderson

Chairman

Notes to the Accounts

1. Accounting Policies

Basis of accounting

Schroder UK Mid Cap Fund plc ("the Company") is registered in Scotland as a public company limited by shares. The Company's registered office is 1 Exchange Crescent, Conference Square, Edinburgh EH3 8UL.

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 October 2019. All of the Company's operations are of a continuing nature.

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 directors believe that the Company has adequate resources to continue operating for at least 12 months from the date of approval of these accounts. In forming this opinion, the directors have taken into consideration: stress testing prepared by the Manager which modelled a 50% decline in valuation of investments and investment income and demonstrated the Company's ability to comply with the covenants of its lending agreements and pay expenses; the effect of COVID-19; the controls and monitoring processes in place; the Company's level of debt and other payables; the low level of operating expenses, comprising largely variable costs which would reduce pro rata in the event of a market downturn; and that the Company's assets comprise cash and readily realisable securities quoted in active markets.

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 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 2019.

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

2. Income

	2020	2019
Revenue:	£'000	£'000
Income from investments:
UK dividends	3,924	7,988
UK property income distributions	231	272
	4,155	8,260
Other interest receivable and similar income:
Deposit interest	4	9
	4,159	8,269
Capital:
Special dividends allocated to capital	-	615

3. Investment management fee

		2020			2019
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Management fee	402	939	1, 341	442	1,032	1,474

The basis for calculating the investment management fee is set out in the Directors' Report on page 25 of the Annual Report and Accounts and details of all amounts payable to the Manager are given in note 10 on page 51 of the Annual Report and Accounts.

4. Dividends

(a)   Dividends paid and declared

	2020	2019
	£'000	£'000
2019 final dividend of 14.7p (2018: 12.7p) paid out of revenue profits1	5,198	4,553
Interim dividend of 3.8p (2019: 3.8) paid out of revenue profits	1,344	1,362
Total dividends paid in the year	6,542	5,915
	2020	2019
	£'000	£'000
2020 final dividend declared of 9.5p (2019: 14.7p) to be paid out of revenue profits	3,331	5,254

¹ The 2019 final dividend amounted to £5,254,000. However the amount actually paid was £5,198,000 as shares were purchased into treasury, after the accounting date, but prior to the dividend Record Date.

(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 £3,155,000 (2019: £7,325,000).

	2020	2019
	£'000	£'000
Interim dividend of 3.8p (2019: 3.8p)	1,344	1,362
Final dividend of 9.5p (2019: 14.7p)	3,331	5,254
	4,675	6,616

5. Return/(loss) per share

	2020	2019
	£'000	£'000
Revenue return	3,155	7,325
Capital loss	(20,084)	(4,123)
Total (loss)/return	(16,929)	3,202
Weighted average number of shares in issue during the year	35,362,365	35,848,258
Revenue return per share	8.92p	20.43p
Capital loss per share	(56.79)p	(11.50)p
Total (loss)/return per share	(47.87)p	8.93p

6. Called-up share capital

	2020	2019
	£'000	£'000
Allotted, called-up and fully paid:
Ordinary shares of 25p each:
Opening balance of 35,741,190 (2019: 35,851,190) shares, excluding shares held in treasury	8,935	8,963
Repurchase of 675,000 (2019: 110,000) shares into treasury	(169)	(28)
Subtotal of 35,066,190 (2019: 35,741,190) shares	8,766	8,935
1,077,500 (2019: 402,500) shares held in treasury	270	101
Closing balance1	9,036	9,036

¹ Represents 36,143,690 (2019: 36,143,690) shares of 25p each, including 1,077,500 (2019: 402,500) shares held in treasury. During the year, the Company purchased 675,000 of its own shares, nominal value £168,750 to hold in treasury for a total consideration of £3,429,000 representing 1.9% of the shares outstanding at the beginning of the year, excluding shares held in treasury. The reason for these share repurchases was to seek to manage the volatility of the share price discount to net asset value per share.

7. Net asset value per share

	2020	2019
Net assets attributable to the Ordinary shareholders (£'000)	199,524	226,424
Shares in issue at the year end	35,066,190	35,741,190
Net asset value per share	568.99p	633.51p

No director of the Company served as a director of any member of the Schroder Group, at any time during the year.

8. 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 44.

At 30 September 2020, the Company's investments were all categorised in Level 1 (2019: same).

9. Status of announcement

2019 Financial Information

Th e figures and financial information for 2019 are extracted from the published Annual Report and Accounts for the year ended 30 September 2019 and do not constitute the statutory accounts for that year. The 2019 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.

2020 Financial Information

The figures and financial information for 2020 are extracted from the Annual Report and Accounts for the year ended 30 September 2020 and do not constitute the statutory accounts for the year. The 2020 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 2020 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

 

 

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