Annual Financial Report

RNS Number : 6737I

Schroder UK Mid Cap Fund PLC

06 December 2022

 

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 2022 (the "Annual Report), as required by the Financial Conduct Authority's Disclosure Guidance and Transparency Rule 4.1.

The Annual Report will also be published in hard copy format and an electronic copy will shortly be available to download from the Company's website  www.schroders.co.uk/ukmidcap  

Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/6737I_1-2022-12-5.pdf  

The Annual Report has been submitted to the National Storage Mechanism and it will shortly be available for inspection at  https://data.fca.org.uk/#/nsm/nationalstoragemechanism  

Enquiries:

Georgina Gearing-Bell

Schroder Investment Management Limited

Tel: [phone]

Chairman's Statement

Investment and share price performance

The Company's net asset value ("NAV") total return for the year was -30.0% compared to -26.8% from the Company's Benchmark (the FTSE 250 ex Investment Trusts Index). The share price total return over the same period was -32.5%.

The challenges for UK equities and in particular for those of the mid-cap area grew considerably in the second half of the financial year. The war in Ukraine led to significant increases in raw material costs, hence threatening corporate margins and a squeeze in consumer expenditure. Higher input costs and supply chain bottle necks in part contributed to a very marked increase in headline inflation. This brought with it the start of a significant tightening of monetary policy through higher interest rates which lead to valuation compression for higher growth companies which make up much of the mid-cap universe. Lastly, the UK experienced a period of political turmoil with the resignation of the Prime Minister and uncertainty over the likely successor and policy direction.

While higher inflation and tightening monetary policy affected all equity markets, the UK seemed more vulnerable than most perhaps because of the political uncertainties. Overall, we saw a further de-rating of the UK market which has been evident since at least 2016 despite the resilience reported by most companies through the period. The last year has clearly been a challenging period for UK equities, with small and mid caps particularly affected by worsening investor sentiment. This has left the investment universe available to your managers clearly showing attractive valuations and considerable potential for capital gains over the next few years as the current clouds affecting the outlook hopefully clear. For more details on the drivers of performance during the period please refer to the Portfolio Manager's review.

Revenue and dividends

In June of this year, the Board was pleased to announce an increased interim dividend of 5.0 pence per share which represented a 32% increase on the interim dividend paid in 2021. Following a significant recovery in portfolio income, we have declared a final dividend of 14 pence per share for the year ended 30 September 2022. The proposed final dividend, combined with the interim dividend of 5.0 pence per share already paid during the year, brings total dividends for the year to 19 pence per share, a level which is covered by current year earnings, and an increase of 28.4% in dividends declared in respect of the previous financial year. This total dividend is the largest annual distribution to shareholders for the Company to date. At the current share price of 553 pence (as at 5 December 2022) this represents a yield of 3.4%. A resolution to approve the payment of the final dividend for the year ended 30 September 2022 will be proposed at the forthcoming Annual General Meeting ("AGM"). If the resolution is passed, the dividend will be paid on 27 February 2023 to shareholders on the register on 13 January 2023.

Gearing

At the year end, net gearing was 10.8% (2021: 7.7%), which comprised the Company's £25 million loan with Scotiabank Europe plc, maturing in February 2023. As disclosed in the Half-Year Report, the Board also approved an additional £10 million three-year revolving loan facility with Scotiabank in addition to the existing £25 million three-year term loan. It is expected that the Manager will continue to use this gearing to take advantage of attractive new investment opportunities and to participate in capital raisings by portfolio companies. The Board is currently exploring options to replace the £25 million facility upon its expiration in February 2023 and still believes in the long-term attractiveness of gearing, but needs to be mindful of the increased cost of debt at present.

Discount management

During the period the Company's discount to NAV widened from -7.8% to -11.4% at period end, averaging -8.0%. The Board continues to actively monitor the level of the Company's discount and bought back shares during the period when the discount was considered to be unduly wide. The Company bought back a total of 485,000 shares during the period between 27 April and 20 May 2022 with this activity being accretive to the Trusts net asset value.

In order to facilitate future buybacks should we deem them to once again be appropriate, we propose that the Company's 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.

Environmental, Social and Governance ("ESG")

The Board recognises the continued importance of ESG concerns to investors. ESG considerations have been embedded within the Schroders investment process for over 20 years and the degree of engagement that has occurred with investee companies on areas of investor concern and ways in which improvements can be made can be clearly demonstrated. The board believes that such engagement can bring about improved valuations of companies to the benefit of shareholders. In addition, while the Company is not managed with a specific ESG mandate, the Board is pleased to report that the portfolio has a carbon intensity of around half that of its benchmark. More details of the Manager's approach to ESG can be found on pages 13 to 16 of the Strategic Report in the full Annual Report and Accounts.

Board Changes

In line with the Board's tenure policy, Clare Dobie retired from the Board on 15 September 2022 following nine years as a director of the Company. I would like to thank Clare for her outstanding contribution and commitment to the Board. We were delighted to appoint Helen Galbraith to the Board in April 2022, who brings a wealth of experience in the asset management industry to the Board.

Annual General Meeting

The Company's AGM will be held at 12.00 noon on Tuesday, 21 February 2023. We encourage shareholders to attend in person and, if unable to, to cast their votes by proxy. The AGM will include a presentation by the Manager on the prospects for the UK market and the Company's investment strategy, and will provide an opportunity for shareholders to ask questions of the Board and the Manager. The meeting will be held at the Manager's office at 1 London Wall Place, London, EC2Y 5AU.

It will also be available to watch online and the details are set out below. Any shareholders planning on attending the AGM will also be able to watch the Manager's presentation. To sign up to watch the AGM and presentation, please click on this link https://schroders.zoom.us/webinar/register/WN_Zy1kUakRS_WRiTD-sxsLsA . By using a webinar, I hope more shareholders and interested parties will be able to listen to, and ask questions of, the Manager.

In addition to the presentation at the AGM, Jean Roche will also be presenting a separate webinar at 11.00am on Tuesday 7 February 2023, and all shareholders are encouraged to sign up to hear the fund manager's views. To register for the webinar, please email the following address to receive details of how to join [e-mail] .

Outlook

The period under review has undoubtedly been a challenging one for the Company with sentiment towards the UK deteriorating as global and domestic headwinds strengthened. The prospect of high and sustained inflation, rising interest rates, and a looming recession will undoubtedly present a challenging backdrop at least in the short term for companies, investors, and households looking forwards. Political and policy chaos has only heightened the economic uncertainty. There can be no hiding from the fact that the challenges facing the UK have not been this substantial for many a year. However, out of adversity can come considerable opportunity.

Looking forwards at the prospects for UK mid-caps, there are reasons for optimism despite the turbulent backdrop and recent equity market weakness. Current valuations would suggest that the market has already priced in a lot of the prevailing bad news with small and mid cap stocks having underperformed large caps meaningfully during the period. Valuations remain extremely attractive relative to history and your Portfolio Manager feels confident that many of the companies in your portfolio are well placed to thrive in this challenging environment. This could be through their ability to pass through input cost pressures to their prices or by being market leaders in niche fields with services and products with clear competitive advantages or barriers to entry.

In addition, M&A activity is likely to continue as overseas firms see opportunity to expand their operations into the UK at extremely attractive valuations with domestically focused mid-caps likely to attract the most attention. Shareholders in many companies will continue to benefit from ongoing share buyback programs as management teams recognise the value in their own shares at current levels and indeed management are also personally buyers of their own company stock.

In short, the Board believes that weakness in the UK mid-cap area over the last twelve months should be seen as presenting attractive investment opportunities over the medium and longer-term. Your Portfolio Manager will continue to diligently seek out those companies with clear pricing power who are best able to sustain themselves in the short term and emerge as market leaders through the current cycle and beyond.

Robert Talbut

Chairman

5 December 2022

Manager's Review

Market Background

The UK's mature, slower growing large cap companies performed well over the period, underpinning the broader UK equity market. This resilience masked very poor performance from small and mid-cap equities (smids), the extent of whose underperformance against large caps over the period was rare in history. The divergence occurred against the backdrop of a strong US dollar, a positive for more internationally diversified UK large caps, and global shortages and supply chain issues as activity bounced back sharply following Covid lockdowns. Soaring energy and food costs following Russia's invasion of Ukraine added further impetus to interest rate hikes as inflation hit multi-decade highs in many developed countries, including the UK.

All the major developed central banks increased interest rates materially after the Bank of England became the first G7 monetary authority to hike from historically low levels. UK smids are home to many fast-growing companies in new and emerging industries whose valuations have come under intense pressure due to rising interest rates. Higher interest costs have also squeezed consumers already struggling to cope with inflation, further curtailing spending, which disproportionately hit smids. Market dislocation also led to an investor preference for liquidity, which again favoured larger stocks. These trends were exacerbated towards the end of the period as the pound retreated to an all-time low against the dollar, partly on the back of political uncertainty.

Portfolio Performance

The portfolio NAV per share underperformed the Mid 250 Index total return over the 12-month period. Net gearing was the main driver of negative relative returns. At the end of the period the discount was 11.4%, which has narrowed from 15.0% at the end of March.

Speciality chemicals business Synthomer was the lead detractor over the year. The company cut earnings forecasts largely as a result of ongoing destocking in medical nitrile rubber glove markets. Following the creation of a new division through the acquisition of US chemicals company Eastman Chemical Company's specialist adhesives business in the US, Synthomer is better diversified, both geographically and from a product perspective. However, it has a weaker balance sheet than before. With an active divestment strategy now underway alongside a cash saving programme, suspension of the dividend, newly-announced financing from UK Export Finance, and relaxation of banking covenants, it is reasonable to expect to see an improvement in the shares' performance.

Media company Future also underperformed despite small upgrades to earnings expectations this year. The shares suffered a de-rating alongside other growth stocks and amid fears around the outlook for the digital advertising market. Towards the end of the period, the announcement that the very successful CEO may retire at the end of 2023 after ten years at the helm, further impacted confidence. The group's ability to deliver targeted audiences, both online and in print, to a wide range of advertisers in niche interest areas from pets to photography, PCs to pianos, remains a strength, as does a strong bench of talent around the CEO and, now, a very supportive valuation.

Online gaming group 888 was another detractor over the period as the UK regulatory uncertainty, which we had anticipated would be resolved this year, persisted. Although higher than expected cost synergies from the William Hill deal in the UK are helping to offset interest costs, the level of financial leverage in the business in a rising interest rate environment is discouraging the marginal investor (or new investors). We have performed a stress test analysis that has given us some comfort that 888 can pay down debt over the coming years even in a weaker economic environment. Importantly the debt is without a financial covenant, giving management breathing space. Gambling activity has been resilient in previous downturns and 888 have restructured their UK business to focus on lower value, recreational customers. The United States and Canada are structural growth opportunities that we believe are not priced into the shares.

IP Group , which invests in the commercialisation of IP with technology, cleantech and life sciences applications, underperformed over the period as falling technology company valuations affected sentiment towards the company's shares. During the year, one of its portfolio companies, First Light Fusion, achieved nuclear fusion, underscoring the excitement which exists within the company's holdings.

Having been an underperformer of note in the last financial year, it was pleasing to see our conviction in multi-utility provider Telecom Plus rewarded this year. Management upgraded earnings expectations as the company benefited from rising retail energy prices linked to the Russia Ukraine conflict, being able to offer a highly competitive energy deal to prospective customers. This is thanks to its long-term supply agreement with Eon (formerly npower), which essentially secures wholesale energy at an agreed (c.15%) discount, some of which Telecom Plus passes on to its customers. The group also benefitted from the collapse of a number of rival providers which went out of business as they were unable to manage a spike in wholesale gas prices.

Alternative investment manager Man Group bucked the decline in markets as robust net inflows followed strong performance from many of its products. Man announced a second tranche of share buybacks underlining the strength of the balance sheet and confidence in the valuation of its shares. Buybacks are now common amongst our holdings underscoring their attractive valuations and balance sheet strength. This is the second consecutive year that Man has appeared in our top five performers table.

A further positive contribution came from direct marketing specialist, 4imprint. The company published very strong interim results, citing "customer demand at record levels", driven by a post Covid recovery in its key North American market. An increase in the effectiveness of its US TV advertising spend has markedly boosted profitability. The business model allows for growth together with strong cash returns which has allowed the company to retain a net cash balance sheet whilst growing the interim dividend by 167%.

Shares in gaming software group, Playtech, also performed very well as the company became the subject of a three-way bidding war. With the stock hitting five-year valuation highs, we disposed of our position.

Stocks held - significant positive and negative contributions versus the benchmark

		Weight	Relative
Positive	Portfolio	relative to	perfor-
contributor	weight1	index	mance2	Impact3
	(%)	(%)	(%)	(%)
Telecom Plus	2.5	+2.1	73.5	+1.7
Man Group	4.2	+3.0	41.5	+1.1
4Imprint	2.2	+1.9	41.5	+0.7
Playtech	0.2	-0.5	20.9	+0.6
QuinetiQ	2.6	+2.0	30.8	+0.6
		Weight	Relative
Negative	Portfolio	relative to	perfor-
contributor	weight1	index	mance2	Impact3
	(%)	(%)	(%)	(%)
Synthomer	1.7	+1.3	-49.9	-0.9
Future	2.6	+1.6	-37.4	-0.8
888 Holdings	1.1	+0.8	-51.4	-0.7
IP Group	1.9	+1.6	-30.1	-0.6
Dunelm	3.2	+2.8	-18.7	-0.6

Source: Schroders, Factset, close 30 September 2021 to close 30 September 2022.

¹ Weights are averages.

² Performance of the stock in the index relative to the FTSE 250 (ex. ITs) Index return.

³ Impact is the contribution to performance relative to the FTSE 250 (ex. ITs) Index

Our underweight exposure in the travel and leisure sector was positive for relative returns. Specifically, we did not hold shares in airlines Wizz Air and Easyjet, tour operator Tui or Cruise Ship company Carnival. It has been a turbulent year for these businesses. Initial hopes of a post pandemic recovery with the end to travel restrictions and testing has been dwarfed by the headwinds of labour shortages, higher expenses, and economic pressures of higher costs of living on the consumer. All of this combined with, in many cases, more shares in issue than before the pandemic, makes for an unpalatable combination.

Not holding Lloyd's insurer Beazley, a first mover in cyber insurance, detracted from performance. We prefer exposure to the cyber security structural growth theme via our holding in cyber security technology company NCC, and the Roke Manor division of our defence company holding, Chemring.

Lack of exposure to gas and electricity supply business Centrica also weighed on relative returns as it benefitted from high energy prices. Oil and gas producer Harbour Energy also performed strongly for this reason. As mentioned, we have exposure to this theme via our holding in Telecom Plus which performed well during the period.

Stocks not held - significant positive and negative contributions versus the benchmark

		Weight	Relative
Positive	Portfolio	relative to	perfor-
contributor	weight1	index	mance2	Impact3
	(%)	(%)	(%)	(%)
Wizz Air	-	-1.1	-41.6	+0.6
Easyjet	-	-1.2	-28.5	+0.4
Tui	-	-0.8	-33.6	+0.4
Carnival	-	-0.6	-38.6	+0.3
Marks & Spencer	-	-1.2	-19.4	+0.2
		Weight	Relative
Negative	Portfolio	relative to	perfor-
contributor	weight1	index	mance2	Impact3
	(%)	(%)	(%)	(%)
Beazley	-	-1.1	79.4	-0.6
Centrica	-	-1.1	63.4	-0.5
Harbour Energy	-	-0.5	111.2	-0.5
Homeserve	-	-0.9	59.3	-0.4
Mediclinic	-	-0.6	85.6	-0.3

Source: Schroders, Factset, close 30 September 2021 to close 30 September 2022.

¹ Weights are averages.

² Performance of the stock in the index relative to the FTSE 250 (ex. ITs) Index return.

³ Impact is the contribution to performance relative to the FTSE 250 (ex. ITs) Index

Portfolio Activity

Attractively priced structural growth opportunities in market niches continue to influence our new additions to the portfolio.

We took advantage of share price weakness to initiate a new holding in Watches of Switzerland. The company has excellent relationships with luxury brands such as Rolex and Patek Phillipe. The Rolex relationship dates back to 1919 and is a key strength. Watches of Switzerland has a three-year waiting list for new Rolex watches which should ensure resilience through a more difficult economic environment. There are strong growth prospects in the United States where the luxury market is significantly under penetrated compared to the UK due to a lack of investment in the retail experience. Watches of Switzerland is taking market share through both organic and acquisitive growth as the major brands reallocate supply away from smaller retailers to larger, better invested stores.

We initiated a new position in Just Group which we expect to enjoy the structural growth opportunity in the UK bulk annuity market. The company has a strong balance sheet and is a likely beneficiary of a rising interest rate environment. Keeping with structural growth opportunities, but with the theme of digital innovation, we added Clarkson, the London-based leading shipping services provider, whose innovative digital platform, Sea/net, which brings together all aspects of shipping data and services, is showing early signs of success.

We added two new positions in the industrials sector, Weir Group and XP Power. Weir Group, provides equipment (mainly slurry pumps) and aftermarket support for hardware in the mining space. It has an interesting sustainability angle and, we believe, will benefit from increased mining activity. XP Power, is a critical power control solutions provider. The company supplies the technology, semiconductor fab, healthcare and industrial electronics industries, and is exposed to the structural growth drivers within these industries. Whilst the shares have been under some pressure following the unexpected loss of a legal dispute in March 2022, the position's size during the period has meant that it has had little negative impact. We can, additionally, expect the shares to recover as China emerges from pandemic related disruption.

Moving to the energy sector, we added energy services business Petrofac, which we have previously owned, back into the portfolio. After settling a case with the UK's Serious Fraud Office the company can now bid for new business in Saudi Arabia and appears high on the list to be reinstated for work with state oil company Saudi Aramco.

Another new holding in the portfolio is UK independent hospital group Spire Healthcare, which gives options to well-off consumers amid long NHS waiting lists.

Lastly, we diversified our real estate exposure by building positions in both Savills and Sirius Real Estate. We initiated our position in the former to gain exposure to the theme of a rapidly changing property landscape as opposed to the owners of the underlying properties. We bought a position in mixed use business park landlord and operator Sirius Real Estate as it raised capital for an attractive UK deal which complements its German business. The German operations are poised to benefit, in the medium term, from a trend towards near shoring.

Turning to sales over the period, we disposed of positions in both Dechra Pharmaceuticals and Electrocomponents (now renamed RS Group) following their promotions to the FTSE 100, in line with our stated policy of selling stocks which reach this pinnacle.

M&A activity continues to remain elevated in the small and mid-cap space. Takeovers from overseas investors in particular, continue to be a driver for turnover in the portfolio. UK based wealth manager, Brewin Dolphin, received a bid with a premium of over 60% from Royal Bank of Canada. Software company Micro Focus received a bid at over 90% premium to the previous close from Canadian software company OpenText. Both share prices were lifted following the bids, and we have since sold our holdings. Finally, gaming software provider, Playtech, was also subject to multiple ex-UK takeover bids during the period, which lifted the share price whereupon we decided to take profits and disposed of our position.

We disposed entirely of our holding in provider for private rented accommodation Grainger. We also exited a residual stake in commercial real estate business CLS Holdings as we expect to see further pressure in the office space, not only from the shift in working patterns, but also from regulation. We have diversified our (still underweight) real estate exposure towards new holdings Savills and Sirius Real Estate.

We also sold our small position in alternative investment manager and 2021 IPO, Petershill Partners. We anticipate downward pressure on the valuations of underlying holdings in the venture capital funded companies in which it holds stakes, due to the squeeze on capital provision because of structurally higher interest rates.

Outlook

There has been no respite this year as a UK mid cap investor. Companies have seen 1970s-style pressure on supply chains and inflation rates in their cost bases. Investors have responded by adopting a risk off approach, moving into the largest capitalised stocks for "safety". This has had a disproportionate impact on the SMID area of the market as share prices have sold off aggressively: year to date, the benchmark index has returned -27.7%.

There has been some pressure on earnings due to the above factors and the Company's portfolio has not escaped entirely from these challenges. However, earnings growth for the overall portfolio continues to be healthy even as stocks continue to de-rate. Stock valuations are starting to attract attention from several quarters, which we discuss further below. This is a theme which we expect to continue, especially as sterling weakness persists.

Putting some more numbers around this, 85 FTSE 250 companies' share prices are down more than one third year to date. This compares with 140 during the GFC in 2008, when the global banking system failed.

We note that three types of market participants seem most willing to take advantage of this opportunity. These are private equity and strategic corporate acquirors, particularly North American ones, management teams via share buybacks, and company directors.

•       UK SMIDs which have been acquired or approached since the beginning of the year include Brewin Dolphin, Micro Focus, Playtech and Ted Baker, as mentioned above. The list goes on, however, and includes both established mid cap companies such as Euromoney and Homeserve and more recent IPOs Darktrace and The Hut.

•       A significant proportion, fifteen, of our c. fifty holdings are currently buying back shares. These include Grafton, Pets at Home, Redrow, Man Group and Spectris.

•       Insider share purchases are becoming more frequent and may be considered a significant indicator of management confidence in their business.

Turning back to the UK economy, the big question is where inflation goes from here and whether unfilled job vacancies outnumbering those actively seeking work translates into rising wage growth. Although energy and food inflation are widely anticipated to ease next year, domestically driven inflation remains a concern. It is notable that the Bank of England now appears to be managing down expectations of further significant rate rises. If this comes to pass, it should help to quieten financial markets. Meanwhile, the consumer will be cushioned to some extent by the government's energy package and residual excess savings.

As stock pickers, we are confident that the collective strength of our holdings' balance sheets will provide resilience in a challenging economic environment. We are sticking to our sell discipline, avoiding companies whose business models are in danger of being disrupted while seeking out companies which have the ability to reinvent themselves, or which might be the next mid cap disruptor.

The team

The Company's portfolio is co-managed by Jean Roche and Andy Brough.

Jean, who has been the lead manager since 2021, and was co-manager for four years before this, has over 20 years of investment experience and holds the Chartered Financial Analyst designation, as well as an MSc in Financial and Industrial Mathematics. She was previously named a Wall Street Journal analyst of the year based on her stock picking skills.

Extracts from the Strategic Review

Principal Risks and Uncertainties, including Emerging Risks

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.

Last year the following risks were identified as emerging risks, which this year the Board has re-categorised as principal risks: political risk, climate change risk and inflation risk. Additionally, the Board has considered the ongoing global supply chain issues to represent a new principal risk. In all other respects, the Company's principal risks and uncertainties have not changed materially since the date of the previous Annual Report and are not expected to change materially for the current financial year.

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.

Risk	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 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. The Manager is currently in discussion with several providers to secure new borrowing facilities upon expiry of the current term loan in February 2023. If a new loan cannot be arranged with acceptable terms, the Board is satisfied that this does not represent a significant risk to the Company since it has sufficient readily realisable assets to repay the loan. The Board also reviews the cost of gearing.
 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.
Political risk This includes trade wars, regional tensions and UK political risks specifically.	The Board continues to monitor the impact of 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 A failure to understand the pricing of assets affected by climate change or a lower demand for impacted assets could lead to poor investment decisions or more volatile pricing as asset prices adjust to reflect the increasing regulation of carbon emissions.	 The Manager has developed a range of proprietary tools to better understand the impacts of climate change on the portfolio. The investment process applied by the portfolio managers is ESG "integrated". The Manager monitors the emissions of investee companies and can engage with companies to reduce their emissions or aim to invest in companies committed to reaching net zero carbon emissions. The Board receives updates from the Manager at Board meetings and in 2022 held a session with the Manager and the Schroders sustainability team to discuss ESG matters, including climate change. The Board has challenged the Manager regarding the need to carefully consider and monitor sustainability and environmental and societal impacts when assessing investment opportunities, in addition to the well founded attention to good corporate governance principles, which have been in place for many years.
Inflation & Global supply chain risk Rising supplier costs and availability of supply.	The Board has, in conjunction with the Manager, considered the risks relating to elevated levels of price inflation, generally, together with the evolution in the way that supply chains are operating and the concomitant risks of rising supplier costs and availability of supply. It is the Board's view that the complexion of these risks has changed over the past year in a way that requires them now to be assessed as principal risks. The key mitigation to these risks comes from diligent appraisal and monitoring of investments by the Manager, including engagement with the management of investee companies, together with a critical assessment of investee companies' ability to pass on rising costs to customers as a result of their pricing power and strong market positions alongside their ability to control costs.

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 below.

Directors' Report

The directors submit their report and the audited financial statements of the Company for the year ended 30 September 2022.

Directors and officers

The Directors as at 30 September 2022 and their biographies are set out on pages 22 and 23 of the full Annual Report and Accounts.

Chairman

The Chairman is an independent non-executive director who is responsible for leadership of the Board and ensuring its effectiveness in all aspects of its role. The Chairman's other significant commitments are detailed on page 22 of the full Annual Report and Accounts.

Company Secretary

Schroder Investment Management Limited provides company secretarial support to the Board and is responsible for assisting the Chairman with board meetings and advising the Board with respect to governance. The Company Secretary also manages the relationship with the Company's service providers, except for the Manager. Shareholders wishing to lodge questions in advance of the AGM are invited to do so by writing to the Company Secretary at the address given on the outside back cover.

Role and operation of the Board

The Board is the Company's governing body; it sets the Company's strategy and is collectively responsible to shareholders for its long-term success. The Board is responsible for appointing and subsequently monitoring the activities of the Manager and other service providers to ensure that the investment objective of the Company continues to be met. The Board also ensures that the Manager adheres to the investment restrictions set by the Board and acts within the parameters set by it in respect of any gearing. The Strategic Review on pages 11 to 21 of the full Annual Report and Accounts sets out further detail of how the Board reviews the Company's strategy, risk management and internal controls and also includes other information required for the Directors' Report, and is incorporated by reference.

A formal schedule of matters specifically reserved for decision by the Board has been defined and a procedure adopted for directors, in the furtherance of their duties, to take independent professional advice at the expense of the Company.

The Chairman ensures that all directors receive relevant management, regulatory and financial information in a timely manner and that they are provided, on a regular basis, with key information on the Company's policies, regulatory requirements and internal controls. The Board receives and considers reports regularly from the Manager and other key advisers and ad hoc reports and information are supplied to the Board as required.

The Board is satisfied that it is of sufficient size with an appropriate balance of diverse skills and experience, independence and knowledge of the Company, its sector and the wider investment trust industry, to enable it to discharge its duties and responsibilities effectively and that no individual or group of individuals dominates decision making.

The Board has approved a policy on directors' conflicts of interest. Under this policy, directors are required to disclose all actual and potential conflicts of interest to the Board as they arise for consideration and approval. The Board may impose restrictions or refuse to authorise such conflicts if deemed appropriate. No directors have any connections with the Manager, shared directorships with other directors or material interests in any contract which is significant to the Company's business.

Key service providers

The Board has adopted an outsourced business model and has appointed the following key service providers:

Manager

The Company is an alternative investment fund as defined by the AIFM Directive and has appointed Schroder Unit Trusts Limited ("SUTL") as the Manager in accordance with the terms of an alternative investment fund manager ("AIFM") agreement. The AIFM agreement, which is governed by the laws of England and Wales, can be terminated by either party on six months' notice or on immediate notice in the event of certain breaches or the insolvency of either party. As at the date of this report no such notice had been given by either party.

SUTL is authorised and regulated by the Financial Conduct Authority ("FCA") and provides portfolio management, risk management, and administrative, accounting and company secretarial services to the Company under the AIFM agreement. The Manager also provides general marketing support for the Company and manages relationships with key investors, in conjunction with the Chairman, other board members or the corporate broker as appropriate. The Manager has delegated investment management and administrative accounting and company secretarial services to another wholly owned subsidiary of Schroders plc, Schroder Investment Management Limited. The Company Secretary has an independent reporting line to the Manager and distribution functions within Schroders. The Manager has in place appropriate professional indemnity cover.

The Schroders Group manages £752.4 billion  (as at 30 September 2022) on behalf of institutional and retail investors, financial institutions and high net worth clients from around the world, invested in a broad range of asset classes across equities, fixed income, multi-asset and alternatives.

For the financial year ended 30 September 2022, the Manager was entitled to a management fee at a rate of 0.65% per annum of chargeable assets up to £250 million and 0.60% of any amounts in excess of that. Chargeable assets are defined as total assets less current liabilities other than short-term borrowings, 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. The management fee payable in respect of the year ended 30 September 2022 amounted to £1,623,000 (2021: 1,736,000), paid quarterly in arrears.

The Manager is also entitled to receive a fee for providing administrative, accounting and company secretarial services to the Company. For these services, for the year ended 30 September 2022 it received a fee of £144,000 (2021: 137,000), including VAT. The fee continues to be subject to annual adjustment in line with changes in the Retail Prices Index.

Details of all amounts payable to the Manager are set out in note 17 below.

The Board has reviewed the performance of the Manager during the year under review and continues to consider that it has the appropriate depth and quality of resource to deliver superior returns over the longer term. Thus, the Board considers that the Manager's appointment under the terms of the AIFM agreement, is in the best interests of shareholders as a whole.

Depositary

HSBC Bank plc, which is authorised by the Prudential Regulation Authority and regulated by the FCA and the Prudential Regulation Authority, carries out certain duties of a depositary specified in the AIFM Directive including, in relation to the Company, as follows:

-  safekeeping of the assets of the Company which are entrusted to it;

-  cash monitoring and verifying the Company's cash flows; and

-  oversight of the Company and the Manager.

The Company, the Manager and the depositary may terminate the depositary agreement at any time by giving 90 days' notice in writing. The depositary may only be removed from office when a new depositary is appointed by the Company.

Registrar

Equiniti Limited is the Company's registrar. Equiniti's services to the Company include share register maintenance (including the issuance, transfer and cancellation of shares as necessary), acting as agent for the payment of any dividends, management of company meetings (including the registering of proxy votes and scrutineer services as necessary), handling shareholder queries and correspondence and processing corporate actions.

Revenue and final dividend

The net revenue return for the year, after finance costs and taxation, was £7,823,000 (2021: 5,322,000), equivalent to a revenue return per share of 22.43 pence (2021: 15.18 pence).

The directors have recommended the payment of a final dividend for the year of 14.0 pence per share (2021: 11.0 pence) payable on 27 February 2023. The dividend will be payable to shareholders on the register on 13 January 2023 and the ex-dividend date will be 12 January 2023.

Compliance with the Association of Investment Companies ("AIC") Code of Corporate Governance

The Board of the Company has considered the principles and provisions of the AIC Code of Corporate Governance (the "AIC Code"). The AIC Code addresses the Principles and Provisions set out in the UK Corporate Governance Code (the "UK Code"), as well as setting out additional Provisions on issues that are of specific relevance to the Company.

The Board considers that reporting against the Principles and Provisions of the AIC Code, which has been endorsed by the FRC, provides more relevant information to shareholders.

The FCA requires all UK listed companies to disclose how they have complied with the provisions of the UK Code. This statement, together with the Statement of Directors' Responsibilities, viability statement and going concern statement set out on pages 35 and 21 respectively of the full Annual Report and Accounts indicates how the Company has complied with the principles of good governance of the UK Code and its requirements on internal control. The Strategic Report and Directors' Report provide further details on the Company's internal controls (including risk management) governance and diversity policies.

The Company has complied with the Principles and Provisions of the AIC Code throughout the year under review. The UK Code includes provisions relating to the role of the chief executive, executive directors' remuneration and the need for an internal audit function. For the reasons set out in the AIC Code, the Board considers that these provisions are not relevant to the position of the Company, being an externally managed investment company. The Company has therefore nothing to report in respect of these provisions.

The AIC Code is available on the AIC website (www.theaic.co.uk). It includes an explanation of how the AIC Code adapts the Principles and Provisions set out in the UK Code to make them relevant for investment companies. The UK Code is available from the Financial Reporting Council's website at www.frc.org.uk .

Committees

In order to assist the Board in fulfilling its governance responsibilities, it has delegated certain functions to committees. The roles and responsibilities of these committees, together with details of work undertaken during the year under review, are outlined over the next few pages. The reports of the audit and risk committee, nomination committee, management engagement committee and remuneration committee are incorporated into and form part of the Directors' Report. Given the Board's size and composition, it considers all directors being members of its delegated committees appropriate.

Other required Directors' Report disclosures under laws, regulations, and the AIC Code

Status

The Company is domiciled in the UK and is an investment company within the meaning of section 833 of the Companies Act 2006.

The Company carries on business as an investment trust. Its shares are listed and admitted to trading on the premium segment of the main market of the London Stock Exchange. It has been approved by HM Revenue & Customs as an investment trust in accordance with section 1158 of the Corporation Tax Act 2010, by way of a one-off application and it is intended that the Company will continue to conduct its affairs in a manner which will enable it to retain this status. The Company is not a "close" company for taxation purposes.

Information included in Strategic Report

The Company's disclosures on future developments and carbon emissions are included in the Strategic Report on pages 18 and 16 respectively of the full Annual Report and Accounts.

Financial risk management

Details of the Company's financial risk management objectives and exposure to risk can be found in note 20 below.

Share capital and substantial interests

As at the date of this report, the Company had 36,143,690 ordinary shares of 25p in issue. 1,562,500 shares were held in treasury. Accordingly, the total number of voting rights in the Company at the date of this report is 34,581,190. No shares have been repurchased since the year end and the date of this report. Further information is provided in note 14 below. All shares in issue rank equally with respect to voting, dividends and any distribution on winding up. There are no restrictions concerning the transfer of securities in the Company; no special rights with regard to control attached to securities; no restrictions on voting rights; no agreements between holders of securities regarding their transfer known to the Company; and no agreements to which the Company is a party which might change or fall away on a change of control or trigger any compensatory payments for Directors following a successful takeover bid.

The Company is aware that certain changes to the interests held in the Company of 3% or more of the voting rights attaching to the Company's issued share capital have taken place since the last notification made by investors to the Company. As a result, the following table is based on what the Board believes to be the correct interests in the Company, using the shareholder analysis prepared by Richard Davies Investor Relations Limited, and which is reviewed at every Board meeting.

	As at
	30 September	% of total
	2022	voting rights
Clients of Hargreaves
Lansdown, stockbrokers (EO)	3,853,217	11.14
Evelyn Partners	3,583,010	10.36
Clients of Interactive Investor (EO)	2,913,360	8.42
Charles Stanley Group plc	2,742,653	7.93
Clients of Redmayne Bentley, stockbrokers	1,867,043	5.40
Rathbone Brothers PLC	1,693,127	4.90
Saba Capital Management	1,403,155	4.06
Allspring Global Investments	1,330,447	3.85
Clients of AJ Bell, stockbrokers (EO)	1,173,109	3.39

Source: Richard Davies Investor Relations Limited

Following the year end and at the date of this report, there have been no changes to the interests disclosed above.

Provision of information to the auditor

The directors who held office at the date of approval of this report confirm that, so far as each of them is aware, there is no relevant audit information of which the Company's auditor is unaware; and each director has taken all the steps that he or she ought to have taken as a director in order to make himself or herself aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

Directors' attendance at meetings

Four board meetings are usually scheduled each year to deal with matters including: the setting and monitoring of investment strategy; approval of borrowings and/or cash positions; review of investment performance; the level of discount of the Company's shares to underlying NAV per share; promotion of the Company; and services provided by third parties. Additional meetings of the Board are arranged as required.

The number of scheduled meetings of the Board and its committees held during the financial year and the attendance of individual directors is shown below. Whenever possible all directors attend the AGM.

			Audit	Management
		Nomination	and Risk	Engagement	Remuneration
Director	Board	Committee	Committee	Committee	Committee
Robert Talbut	4/4	1/1	2/2	1/1	1/1
Wendy Colquhoun	4/4	1/1	2/2	1/1	1/1
Clare Dobie*	4/4	1/1	2/2	1/1	1/1
Helen Galbraith**	2/2	1/1	1/1	1/1	1/1
Andrew Page	4/4	1/1	2/2	1/1	1/1

*Clare Dobie retired on 15 September 2022

**Helen Galbraith was appointed on 7 April 2022

In addition to the above meetings, the Board met once on an ad-hoc basis during the year to discuss the Company's discount level and the Nomination Committee met once on an ad-hoc basis to approve the appointment of Helen Galbraith.

The Board is satisfied that the Chairman and each of the other non-executive directors commits sufficient time to the affairs of the Company to fulfil their duties as directors.

Directors' and officers' liability insurance and indemnities

Directors' and officers' liability insurance cover was in place for the directors throughout the year. The Company's articles of association provide, subject to the provisions of UK legislation, an indemnity for directors in respect of costs which they may incur relating to the defence of any proceedings brought against them arising out of their positions as directors, in which they are acquitted or judgment is given in their favour by the court. This is a qualifying third party indemnity policy and was in place throughout the year under review for each director and to the date of this report.

By order of the Board

Schroder Investment Management Limited

Company Secretary

5 December 2022

Audit and Risk Committee Report

The responsibilities and work carried out by the audit and risk committee during the year under review are set out in the following report. The duties and responsibilities of the committee, which include monitoring the integrity of the Company's financial reporting and internal controls, are set out in further detail below, and may be found in the terms of reference which are set out on the Company's website, www.schroders.co.uk/midcap.

All directors are members of the committee. Andrew Page is the chairman of committee. The Chair of the Board is a member of the Committee, and was independent on appointment. The Board has satisfied itself that at least one of the committee's members has recent and relevant financial experience and that the committee as a whole has competence relevant to the sector in which the company operates.

Approach
The committee's key roles and responsibilities are set out below.
Risks and Internal Controls	Financial Reports and Valuation	Audit
Principal risks To establish a process for identifying, assessing, managing and monitoring emerging and principal risks of the Company.	Financial statements To monitor the integrity of the financial statements of the Company and any formal announcements relating to the Company's financial performance and valuation. To review the half year report.	Audit results To discuss any matters arising from the audit and recommendations made by the auditor.
Emerging risks and uncertainties To ensure a robust assessment of the Company's emerging and principal risks and procedures are in place to identify emerging risks, and an explanation of how these are being managed or mitigated.	Going concern To review the position and make recommendations to the Board in relation to whether it considers it appropriate to adopt the going concern basis of accounting in preparing its annual and half-yearly financial statements.	Auditor appointment, independence and performance To make recommendations to the Board, in relation to the appointment, re-appointment, effectiveness and removal of the external auditor, to review their independence, and to approve their remuneration and terms of engagement. Reviewing the audit plan and engagement letter.

The below table sets out how the committee discharged its duties during the year. The committee met twice during the year. An evaluation of the committee's effectiveness and review of its terms of reference was completed during the year.

The committee identified one potentially significant financial reporting risk, which is unchanged from the prior period, being the valuation and existence of investments, as well as several other financial reporting risks. Each of the matters considered during the committee's review are outlined below.

Application during the year
Risks and Internal Controls	Financial Reports and Valuation	Audit
Service provider controls Reviewing the operational controls maintained by the Manager, depositary and registrar.	Recognition of investment income Considered dividends received against forecast and the allocation of special dividends to income or capital.	Effectiveness of the independent audit process and auditor performance Evaluated the effectiveness of the independent audit firm and process prior to making a recommendation that it should be re-appointed at the forthcoming AGM. Evaluated the auditor's performance against agreed criteria including: qualification; knowledge, expertise and resources; independence policies; effectiveness of audit planning; adherence to auditing standards; and overall competence was considered, alongside feedback from the Manager on the audit process. Professional scepticism of the auditor was questioned and the committee was satisfied with the auditor's replies.
Internal controls and risk management Consideration of several key aspects of internal control and risk management operating within the Manager, depositary and registrar, including assurance reports and presentations on these controls. It is considered that the Company does not require an internal audit function, principally because the Company delegates its day-to-day operations to third parties, which are monitored by the Committee and provide control reports on their operations annually.	Calculation of the investment management fee and performance fee Consideration of methodology used to calculate the fees, matched against the criteria set out in the AIFM agreement.	Auditor independence The committee last undertook an audit tender process in 2017 when KPMG LLP was appointed as auditor in respect of the financial year ended 30 September 2017. The Company is required to tender the external audit no later than for year ending 30 September 2027. In accordance with professional and regulatory standards, the senior statutory auditor responsible for the audit is rotated at least every five years in order to protect independence and objectivity and to provide fresh challenge to the business. This is the third year that the senior statutory auditor, Gary Fensom, has conducted the audit of the Company's financial statements. There are no contractual obligations restricting the choice of independent auditor.
Compliance with the investment trust qualifying rules in S1158 of the Corporation Tax Act 2010 Consideration of the Manager's report confirming compliance.	Overall accuracy of the annual report and accounts Consideration of the draft annual report and accounts and the letter from the Manager in support of the letter of representation to the auditor.	Audit results Met with and reviewed a comprehensive report from the auditor which detailed the results of the audit, compliance with regulatory requirements, safeguards that have been established, and on their own internal quality control procedures.
Principal risks Reviewing the principal risks faced by the Company and the system of internal control.	Valuation and existence of holdings Quarterly review of portfolio holdings and assurance reports.	Meetings with the auditor Met the auditors without representatives of the Manager present. Representatives of the auditors attended the committee meeting at which the draft annual report and accounts was considered.
	Fair, balanced and understandable Reviewed the annual report and accounts to ensure that it was fair, balanced and understandable.	Provision of non-audit services by the auditor The committee has reviewed the FRC's Guidance on Audit Committees and has formulated a policy on the provision of non-audit services by the Company's auditor. The committee has determined that the Company's appointed auditor will not be considered for the provision of certain non-audit services, such as accounting and preparation of the financial statements, internal audit and custody. The auditor may, if required, provide other non-audit services which will be judged on a case-by-case basis. The auditor did not provide any non-audit services to the Company during the year.
	Going concern and viability Reviewing the impact of risks on going concern and longer-term viability.	Consent to continue as auditor KPMG LLP indicated to the committee their willingness to continue to act as auditor.

Recommendations made to, and approved by, the Board:

As a result of the work performed, the committee has concluded that the annual report for the year ended 30 September 2022, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position, performance, business model and strategy, and has reported on these findings to the Board. The Board's conclusions in this respect are set out in the Statement of Directors' Responsibilities below.

Having reviewed the performance of the auditors as described above, the committee considered it appropriate to recommend the firm's re-appointment. Resolutions to re-appoint KPMG LLP as auditor to the Company, and to authorise the directors to determine their remuneration will be proposed at the AGM.

Andrew Page

Chairman of Audit and Risk Committee

5 December 2022

Management Engagement Committee Report

The management engagement committee is responsible for (1) the monitoring and oversight of the Manager's performance and fees, and confirming the Manager's ongoing suitability, and (2) reviewing and assessing the Company's other service providers, including reviewing their fees. All directors are members of the committee. Robert Talbut is the chairman of the committee. Its terms of reference are available on the Company's website, www.schroders.co.uk/ukmidcap.

Approach
Oversight of the Manager	Oversight of other service providers
The committee: • reviews the Manager's performance, over the short- and long-term, against the Benchmark, peer group and the market. •       considers the reporting it has received from the Manager throughout the year, and the reporting from the Manager to the shareholders. •       assesses management fees on an absolute and relative basis, receiving input from the Company's broker, including peer group and industry figures, as well as the structure of the fees. •       reviews the appropriateness of the Manager's contract, including terms such as notice period. •       assesses whether the Company receives appropriate administrative, accounting, company secretarial and marketing support from the Manager.	The committee reviews the performance and competitiveness of the following service providers on at least an annual basis: • Depositary and custodian • Corporate broker • Registrar • Lender The committee also receives a report from the Company Secretary on ancillary service providers, and considers any recommendations.

Application during the year
The committee undertook a detailed review of the Manager's performance and agreed that it has the appropriate depth and quality of resource to deliver superior returns over the longer term. The committee reviewed the management fee structure and agreed that no changes would be proposed. The committee also reviewed the terms of the AIFM agreement and agreed they remained fit for purpose. The committee reviewed the other services provided by the Manager and agreed they were satisfactory.	The annual review of each of the other service providers was satisfactory.

Recommendations made to, and approved by, the Board:

•       That the ongoing appointment of the Manager on the terms of the AIFM agreement was in the best interests of shareholders as a whole.

•       That the Company's service providers' performance remained satisfactory.

Nomination Committee Report

The nomination committee is responsible for (1) the recruitment, selection and induction of directors, (2) their assessment during their tenure, and (3) the Board's succession. All directors are members of the committee. Robert Talbut is the chairman of the committee. Its terms of reference are available on the Company's website, www.schroders.co.uk/ukmidcap.

Approach
Selection and induction	Board evaluation	Succession
• Committee prepares a job specification for each role, which is shared with an independent recruitment firm. For the Chairman and the chairs of committees, the committee considers current board members too. • Job specification outlines the knowledge, professional skills, personal qualities and experience requirements. • Potential candidates assessed against the Company's diversity policy. • Committee discusses the long list, invites a number of candidates for interview and makes a recommendation to the Board. • Committee reviews the induction and training of new directors. On appointment, directors receive a full, formal and tailored induction. Directors are also regularly provided with key information on the Company's policies, regulatory and statutory requirements and internal controls. Changes affecting directors' responsibilities are advised to the Board as they arise. Directors also regularly participate in relevant training and industry seminars. • The terms of directors' letters of appointment are available for inspection at the Company's registered office address during normal business hours and during the AGM at the location of such meeting.	• Committee assesses each director annually and considers whether an external evaluation should take place. • Evaluation focuses on whether each director continues to demonstrate commitment to their role and provides a valuable contribution to the Board during the year, taking into account time commitment, independence, conflicts and training needs. • Following the evaluation, the committee provides a recommendation to shareholders with respect to the annual re-election of directors at the AGM. • All directors retire at the AGM and their election, or re-election, as appropriate is subject to shareholder approval.	• Having considered diversity and the need for regular refreshment the Board's policy is that directors' tenure, including the Chairman of the Board, will be for no longer than nine years, except in exceptional circumstances, and that each director will be subject to annual re-election at the AGM. • Committee reviews the Board's current and future needs at least annually. Should any need be identified the committee will initiate the selection process. • Committee oversees the handover process for retiring directors.

For application, see below.

Application during the year
Selection and induction	Board evaluation and directors' fees	Succession
• The committee commenced its search process for a new director and engaged Trust Associates, an external search firm with no other connection to the Board or individual directors.	 • The Board and committee evaluation process was undertaken in September 2022 using a comprehensive questionnaire which was completed by all Directors. • The evaluation of the Chairman was led by the SID, who held a subsequent meeting with the Chairman to discuss the results. • The committee also reviewed each director's time commitment and independence by reviewing a complete list of appointments, including pro bono not for profit roles, to ensure that each director remained free from conflict and had sufficient time available to discharge each of their duties effectively. All directors were considered to be independent in character and judgement. • The committee considered each director's contributions, and noted that in addition to extensive experience as professionals and non-executive directors, each director had valuable skills and experience, as detailed in their biographies on pages 22 and 23 of the full Annual Report and Accounts , which was supported by the completion of a detailed skills matrix by each Director. • Based on its assessment, the committee provided individual recommendations for each director's election, or re-election, as appropriate.	 • The committee reviewed the board tenure policy and agreed it was still fit for purpose. • Claire Dobie retired in September 2022 in accordance with the Board's policy on tenure. • Helen Galbraith was appointed in April 2022 and will be subject to election at the next AGM in accordance with the Company's Articles of Association.

Recommendations made to, and approved by, the Board:

•       That all directors continue to demonstrate commitment to their roles, provide a valuable contribution to the deliberations of the Board, contribute towards the Company's long-term sustainable success, and remain free from conflicts with the Company and its directors, so should all be recommended for election, or re-election, as appropriate by shareholders at the AGM.

•       The appointment of Helen Galbraith as a non-executive director in April 2022.

Remuneration Committee Report

The remuneration committee is responsible for making recommendations to the Board on the remuneration of the directors. All directors are members of the committee and Andrew Page is the chairman. Its terms of reference are available on the Company's website, www.schroders.co.uk/ukmidcap.

Introduction

The following remuneration policy is currently in force and is subject to a binding vote every three years. The next vote will take place at the forthcoming AGM in 2023 and the current policy provisions will continue to apply until that date. An ordinary resolution to approve the directors' remuneration policy will be put to shareholders at the forthcoming AGM (no changes are proposed). The below Directors' Remuneration Report is subject to an annual advisory vote. An ordinary resolution to approve this report will be put to shareholders at the forthcoming AGM.

At the AGM held on 28 January 2020, 99.91% of the votes cast (including votes cast at the Chairman's discretion) in respect of approval of the Directors' Remuneration Policy were in favour while 0.09% were against. 2,706 votes were withheld.

At the AGM held on 9 February 2022, 99.84% of the votes cast (including votes cast at the Chairman's discretion) in respect of approval of the Directors' Remuneration Report for the year ended 30 September 2021 were in favour while 0.16% were against. 49,870 votes were withheld.

Directors' remuneration policy

It is the Board's policy to determine the level of directors' remuneration having regard to amounts payable to non-executive directors in the industry generally, the role that individual directors fulfil in respect of Board and committee responsibilities, and time committed to the Company's affairs, taking into account the aggregate limit of fees set out in the Company's articles of association. This aggregate level of directors' fees is currently set at £200,000 per annum and any increase in this level requires approval by the Board and the Company's shareholders.

The Chairman and the chairman of the audit and risk committee each receives fees at a higher rate than the other directors to reflect their additional responsibilities. Directors' fees are set at a level to recruit and retain individuals of sufficient calibre, with the level of knowledge, experience and expertise necessary to promote the success of the Company in reaching its short and long-term strategic objectives.

The Board and its committees exclusively comprise non-executive directors. No director past or present has an entitlement to a pension from the Company, and the Company has not, and does not intend to, operate a share scheme for directors or to award any share options or long-term performance incentives to any director. No director has a service contract with the Company, however directors have a letter of appointment. Directors do not receive exit payments and are not provided with any compensation for loss of office. No other payments are made to directors other than the reimbursement of reasonable out-of-pocket expenses incurred in attending to the Company's business.

Implementation of policy

The Board did not seek the views of shareholders in setting this remuneration policy. Any comments on the policy received from shareholders would be considered on a case-by-case basis.

As the Company does not have any employees, no employee pay and employment conditions were taken into account when setting this remuneration policy and no employees were consulted in its construction.

Directors' fees are reviewed annually and take into account research from third parties on the fee levels of directors of peer group companies, as well as industry norms and factors affecting the time commitment expected of the directors. New directors are subject to the provisions set out in this remuneration policy.

Directors' annual report on remuneration

This report sets out how the directors' remuneration policy was implemented during the year ended 30 September 2022.

Consideration of matters relating to directors' remuneration

Directors' remuneration was last reviewed by the remuneration committee in September 2022. Although no external advice was sought in considering the levels of directors' fees, information on fees paid to directors of other investment trusts managed by Schroders and peer group companies was provided by the Manager and corporate broker and was taken into consideration.

Following this review, the remuneration committee recommended that with effect from 1 October 2022, the Chairman's annual fee be increased to £40,000, the chairman of the audit and risk committee's annual fee be increased to £32,500 and the annual fee for non-executive directors be increased to £27,000. Directors' fees were last increased with effect from 1 October 2021.

The terms of Directors' letters of appointment are available for inspection at the Company's registered office address during normal business hours and during the AGM at the location of such meeting.

Recommendations made to, and approved by, the Board:

•       That with effect from 1 October 2022, the Chairman's annual fee be increased to £40,000, the chairman of the audit and risk committee's annual fee be increased to £32,500 and the annual fee for non-executive directors be increased to £27,000.

Fees paid to directors

The following amounts were paid by the Company to directors for their services in respect of the year ended 30 September 2022 and the preceding financial year. Directors' remuneration is all fixed; they do not receive any variable remuneration. The performance of the Company over the financial year is presented on page 2 of the full Annual Report and Accounts , under the heading "Financial highlights".

	Fees		Taxable benefits1		Total
	2022	2021	2022	2021	2022	2021	2020	2019
Director	£	£	£	£	£	£	£	£
Robert Talbut (Chairman)2	38,500	32,789	395	-	38,895	32,789	25,411	24,412
Wendy Colquhoun3	26,000	25,000	774	-	26,774	25,000	18,750	-
Clare Dobie4	24,917	25,000	-	-	24,917	25,000	25,141	24,273
Helen Galbraith5	12,543	-	-	-	12,543	-	-	-
Andrew Page	31,250	30,000	-	-	31,250	30,000	30,105	29,000
Robert Rickman6	-	-	-	-	-	-	9,652	24,787
Eric Sanderson7	-	13,144	-	916	-	14,060	39,588	41,470
	133,210	125,933	1,169	916	134,379	126,849	148,647	143,942

¹ Comprise amounts reimbursed for expenses incurred in carrying out business for the Company, and which have been grossed up to include PAYE and NI contributions.

² Appointed Chairman on 8 February 2021.

³ Appointed as a director on 1 January 2020.

⁴ Retired from the board on 15 September 2022.

⁵ Appointed as a director on 7 April 2022.

⁶ Retired from the board on 28 January 2020.

⁷ Retired as Chairman and from the board on 8 February 2021.

Change in annual fees payable

	Year	Year	Year
	ended	ended	ended
	30 Sep	30 Sep	30 Sep
	2022	2021	2020
Director	%	%	%
Robert Talbut (Chairman)1	18.6	29.0	4.1
Wendy Colquhoun2	7.1	33.3	N/a
Clare Dobie3	N/a	(0.6)	3.6
Helen Galbraith4	N/a	N/a	N/a
Andrew Page	4.2	(0.3)	3.8
Robert Rickman5	N/a	N/a	(61.1)
Eric Sanderson6	N/a	(64.5)	(4.5)

¹ Appointed Chairman on 8 February 2021.

² Appointed as a director on 1 January 2020.

³ Retired from the board on 15 September 2022.

⁴ Appointed as a director on 7 April 2022.

⁵ Retired from the board on 28 January 2020.

⁶ Retired as Chairman and from the board on 8 February 2021.

The information in the above tables has been audited.

Expenditure by the Company on remuneration and distributions to shareholders

The table below compares the remuneration payable to directors to distributions made to shareholders during the year under review and the prior financial year. In considering these figures, shareholders should take into account the Company's investment objective.

	Year	Year
	ended	ended
	30 Sep	30 Sep
	2022	2021	Change
	£'000	£'000	%
Remuneration payable to directors	134	127	5.5
Distributions paid to shareholders
Dividends	5,586	4,664
Share buybacks	2,675	-
Total distributions paid to shareholders	8,261	4,664	77.1

Directors' share interests

The Company's articles of association do not require directors to own shares in the Company.

The interests of the directors, including those of persons closely associated, in the Company's share capital at the beginning and end of the financial year under review are set out below:

	30 September	30 September
	2022	2021
Wendy Colquhoun	2,000	2,000
Clare Dobie1	2,044	2,044
Helen Galbraith2	5,500	-
Andrew Page	23,128	9,128
Robert Talbut	8,176	8,176

¹ Clare Dobie retired from the Board on 15 September 2022.

² Helen Galbraith was appointed on 7 April 2022.

There have been no changes notified since the year end.

The information in the above table has been audited.

On behalf of the Board

Andrew Page

Chairman of Remuneration Committee

5 December 2022

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 have elected to prepare the financial statements in accordance with UK accounting standards and applicable law (UK Generally Accepted Accounting Practice), 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 the profit or loss of the company 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 the 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.

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

Each of the Directors, whose names and functions are listed on pages 22 and 23 of the full Annual Report and Accounts confirm that to the best of their 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 Company, together with a description of the principal risks and uncertainties that it faces.

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

Robert Talbut
Chairman

5 December 2022

Income Statement

for the year ended 30 September 2022

	2022			2021
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments held at fair value through profit or loss	-	(88,419)	(88,419)	-	78,136	78,136
Income from investments	8,958	88	9,046	6,453	736	7,189
Other interest receivable and similar income	10	-	10	-	-	-
Gross return/(loss)	8,968	(88,331)	(79,363)	6,453	78,872	85,325
Investment management fee	(487)	(1,136)	(1,623)	(521)	(1,215)	(1,736)
Administrative expenses	(542)	-	(542)	(494)	-	(494)
Net return/(loss) before finance costs and taxation	7,939	(89,467)	(81,528)	5,438	77,657	83,095
Finance costs	(116)	(271)	(387)	(116)	(270)	(386)
Net return/(loss) before taxation	7,823	(89,738)	(81,915)	5,322	77,387	82,709
Taxation	-	-	-	-	-	-
Net return/(loss) after taxation	7,823	(89,738)	(81,915)	5,322	77,387	82,709
Return/(loss) per share	22.43p	(257.32)p	(234.89)p	15.18p	220.69p	235.87p

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/(loss) after taxation is also the total comprehensive income/(loss) 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.

The notes below form an integral part of these accounts.

Statement of Changes in Equity

for the year ended 30 September 2022

	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 2020	9,036	13,971	220	2,184	9,908	157,980	6,225	199,524
Net return after taxation	-	-	-	-	-	77,387	5,322	82,709
Dividends paid in the year	-	-	-	-	-	-	(4,664)	(4,664)
At 30 September 2021	9,036	13,971	220	2,184	9,908	235,367	6,883	277,569
Repurchase of the Company's own shares into treasury	-	-	-	-	(2,675)	-	-	(2,675)
Net (loss)/return after taxation	-	-	-	-	-	(89,738)	7,823	(81,915)
Dividends paid in the year	-	-	-	-	-	-	(5,586)	(5,586)
At 30 September 2022	9,036	13,971	220	2,184	7,233	145,629	9,120	187,393

The notes below form an integral part of these accounts.

Statement of Financial Position

at 30 September 2022

	2022	2021
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	207,289	300,061
Current assets
Debtors	853	1,389
Cash at bank and in hand	4,786	3,564
	5,639	4,953
Current liabilities
Creditors: amounts falling due within one year	(25,535)	(2,445)
Net current (liabilities)/assets	(19,896)	2,508
Total assets less current liabilities	187,393	302,569
Creditors: amounts falling due after more than one year	-	(25,000)
Net assets	187,393	277,569
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	7,233	9,908
Capital reserves	145,629	235,367
Revenue reserve	9,120	6,883
Total equity shareholders' funds	187,393	277,569
Net asset value per share	541.89p	791.56p

These accounts were approved and authorised for issue by the board of directors on 5 December 2022 and signed on its behalf by: 

Robert Talbut

Chairman 

The notes below form an integral part of these accounts.

Notes to the Accounts

1.   Accounting Policies

(a)   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 July 2022. 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 borrowing agreements and pay its operating expenses; 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. In forming this opinion, the directors have also considered any potential impact of the economic aftershocks of the COVID-19 pandemic and climate change on the viability of the Company. The Company's term loan expires on 28 February 2023. If a new loan cannot be arranged with acceptable terms, the Board is satisfied that the Company has sufficient readily realisable assets to repay the loan. Further details of directors' considerations regarding this are given in the Chairman's Statement, Portfolio Managers' Review, Going Concern Statement, Viability Statement and under the Principal Risks and Uncertainties, including Emerging Risks heading above.

The Company has not presented a statement of cash flows, as it is not required for an investment fund whose investments are highly liquid, carried at market value and which presents a statement of changes in equity.

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 2021.

Other than the directors' assessment of going concern, no significant judgements, estimates or assumptions have been required in the preparation of the accounts for the current or preceding financial year.

(b)   Valuation of investments

The Company's business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment objective and information is provided internally on that basis to the Company's board of directors. Accordingly, upon initial recognition the investments are designated by the Company as "held at fair value through profit or loss". They are included initially at fair value which is taken to be their cost, excluding expenses incidental to purchase which are written off to capital at the time of acquisition. Subsequently the investments are valued at fair value, which are quoted bid prices.

Any investments that are unlisted or not actively traded would be valued using a variety of techniques to determine their fair value; any such valuations would be reviewed by both the AIFM's fair value pricing committee and by the directors.

All purchases and sales are accounted for on a trade date basis.

(c)   Accounting for reserves

Gains and losses on sales of investments and the management fee or finance costs allocated to capital, are included in the Income Statement and dealt with in capital reserves. Increases and decreases in the valuation of investments held at the year end, are included in the Income Statement and in capital reserves within "Investment holding gains and losses".

(d)   Income

Dividends receivable are included in revenue on an ex-dividend basis except where, in the opinion of the board, the dividend is capital in nature, in which case it is included in capital.

Where the Company has elected to receive scrip dividends in the form of additional shares rather than in cash, the amount of the cash dividend foregone is recognised in revenue. Any excess in the value of the shares received over the amount of the cash dividend is recognised in capital.

(e)   Expenses

All expenses are accounted for on an accruals basis. Expenses are allocated wholly to the revenue column of the Income Statement with the following exceptions:

-   The management fee is allocated 30% to revenue and 70% to capital in line with the board's expected long-term split of revenue and capital return from the Company's investment portfolio.

-   Expenses incidental to the purchase and sale of investments are written off to capital at the time of the transaction.

These expenses are commonly referred to as transaction costs and comprise brokerage commission and stamp duty.

Details of transaction costs are given in note 10 below.

(f)   Finance costs

Finance costs, including any premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis using the effective interest method and in accordance with FRS 102.

Finance costs are allocated 30% to revenue and 70% to capital in line with the board's expected long-term split of revenue and capital return from the Company's investment portfolio.

(g)   Financial instruments

Cash at bank and in hand may comprise cash and demand deposits which are readily convertible to a known amount of cash and are subject to insignificant risk of changes in value.

Debtors, outstanding settlements, other creditors and accruals do not carry any interest, are short-term in nature and are accordingly stated at nominal value, with debtors reduced by appropriate allowances for estimated irrecoverable amounts.

Bank loans and overdrafts are initially measured at fair value and subsequently at amortised cost. They are recorded at the proceeds received net of direct issue costs.

(h)  Taxation

Taxation comprises amounts expected to be received or paid.

Deferred tax is provided on all timing differences that have originated but not reversed by the balance sheet date.

Deferred tax liabilities are recognised for all taxable timing differences but deferred tax assets are only recognised to the extent that it is probable that taxable profits will be available against which those timing differences can be utilised.

Tax relief is allocated to expenses charged to the capital column of the Income Statement on the "marginal basis". On this basis, if taxable income is capable of being entirely offset by revenue expenses, then no tax relief is transferred to the capital column.

Deferred tax is measured at the tax rate which is expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates that have been enacted or substantively enacted at the accounting date and is measured on an undiscounted basis.

(i)   Value added tax ("VAT")

Expenses are disclosed inclusive of the related irrecoverable VAT.

(j)   Dividends payable

In accordance with FRS 102, the final dividend is included in the accounts in the year in which it is approved by shareholders.

(k)   Repurchases of shares into treasury and subsequent reissues

The cost of repurchasing shares into treasury, including the related stamp duty and transaction costs is dealt with in the Statement of Changes in Equity and charged to "Share purchase reserve". Share repurchase transactions are accounted for on a trade date basis.

The sales proceeds of treasury shares reissued are treated as a realised profit up to the amount of the purchase price of those shares and is transferred to capital reserves. The excess of the sales proceeds over the purchase price is transferred to "share premium".

2.  (Losses)/gains on investments held at fair value through profit or loss

	2022	2021
	£'000	£'000
Gains on sales of investments based on historic cost	17,274	5,867
Amounts recognised in investment holding gains and losses in the previous year in respect of investments sold in the year	(12,932)	(8,897)
Gains/(losses) on sales of investments based on the carrying value at the previous balance sheet date	4,342	(3,030)
Net movement in investment holding gains and losses	(92,761 )	81,166
(Losses)/gains on investments held at fair value through profit or loss	(88,419)	78,136

3.  Income

	2022	2021
Revenue :	£'000	£'000
Income from investments:
UK dividends	8,533	6,125
UK property income distributions	388	328
Stock dividends	37	-
	8,958	6,453
Other interest receivable and similar income:
Deposit interest	10	-
	8,968	6,453
Capital:
Special dividends allocated to capital	88	736

4.  Investment management fee

	2022			2021
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Management fee	487	1,136	1,623	521	1,215	1,736

The bases for calculating the investment management fee and performance fee are set out in the Directors' Report above and details of all amounts payable to the Manager are given in note 17 below.

5.  Administrative expenses

	2022	2021
	£'000	£'000
Other administrative expenses	213	189
Secretarial fee	144	137
Directors' fees	134	126
Auditor's remuneration for audit services1	51	42
	542	494

¹ Includes £9,000 (2021: £7,000) irrecoverable VAT.

6.  Finance costs

	2022			2021
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Interest on bank loans and overdrafts	116	271	387	116	270	386

7.  Taxation

(a)   Analysis of charge in the year:

	2022	2021
	£'000	£'000
Taxation for the year	-	-

(b)   Factors affecting tax charge for the year

The tax assessed for the year is higher (2021: lower) than the Company's applicable rate of corporation tax in for the year of 19.0% (2021: 19.0%).

The factors affecting the current tax charge for the year are as follows:

	2022			2021
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Net return/(loss) on ordinary activities before taxation	7,823	(89,738)	(81,915)	5,322	77,387	82,709
Net return/(loss) on ordinary activities before taxation multiplied by the Company's applicable rate of corporation tax for the year of 19.0% (2021: 19.0%)	1,486	(17,050)	(15,564)	1,011	14,704	15,715
Effects of:
Capital returns on investments	-	16,800	16,800	-	(14,846)	(14,846)
Income not chargeable to corporation tax	(1,628)	(17)	(1,645)	(1,164)	(140)	(1,304)
Unrelieved expenses	142	267	409	153	282	435
Taxation for the year	-	-	-	-	-	-

(c)   Deferred taxation

The Company has an unrecognised deferred tax asset of £9,357,000 (2021: £8,818,000) based on a prospective corporation tax rate of 25.0% (2021: 25%). In its 2021 budget, the UK government announced that the main rate of corporation tax would increase to 25% for the fiscal year beginning on 1 April 2023.

The deferred tax asset has arisen due to the cumulative excess of deductible expenses over taxable income. Given the composition of the Company's portfolio, it is not likely that this asset will be utilised in the foreseeable future and therefore no asset has been recognised in the accounts.

Given the Company's intention to meet the conditions required to retain its status as an Investment Trust Company, no provision has been made for deferred tax on any capital gains or losses arising on the revaluation or disposal of investments.

8.  Dividends

(a)   Dividends paid and declared

	2022	2021
	£'000	£'000
2021 final dividend of 11.0p (2020: 9.5p) paid out of revenue profits	3,857	3,331
Interim dividend of 5.0p (2021: 3.8) paid out of revenue profits	1,729	1,333
Total dividends paid in the year	5,586	4,664
	2022	2021
	£'000	£'000
2022 final dividend declared of 14.0p (2021: 11.0p) to be paid out of revenue profits	4,841	3,857

(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 £7,823,000 (2021: £5,322,000).

	2022	2021
	£'000	£'000
Interim dividend of 5.0p (2021: 3.8p)	1,729	1,333
Final dividend of 14.0p (2021: 11.0p)	4,841	3,857
	6,570	5,190

9.  Return/(loss) per share

	2022	2021
	£'000	£'000
Revenue return	7,823	5,322
Capital (loss)/return	(89,738)	77,387
Total (loss)/return	(81,915)	82,709
Weighted average number of shares in issue during the year	34,874,738	35,066,190
Revenue return per share	22.43p	15.18p
Capital (loss)/return per share	(257.32)p	220.69p
Total (loss)/return per share	(234.89)p	235.87p

10.  Investments held at fair value through profit or loss

	2022	2021
	£'000	£'000
Opening book cost	210,126	192,495
Opening investment holding gains	89,935	17,666
Opening fair value	300,061	210,161
Analysis of transactions made during the year
Purchases at cost	50,360	71,850
Sales proceeds	(54,713)	(60,086)
(Losses)/gains on investments held at fair value	(88,419)	78,136
Closing fair value	207,289	300,061
Closing book cost	223,047	210,126
Closing investment holding (losses)/gains	(15,758)	89,935
Closing fair value	207,289	300,061

Sales proceeds amounting to £54,713,000 (2021: £60,086,000) were receivable from disposals of investments in the year. The book cost of these investments when they were purchased was £37,439,000 (2021: £54,219,000). These investments have been revalued over time and until they were sold any unrealised gains and losses were included in the fair value of the investments.

All investments are listed on a recognised stock exchange.

The following transaction costs, comprising stamp duty and brokerage commission were incurred during the year:

	2022	2021
	£'000	£'000
On acquisitions	226	335
On disposals	28	30
	254	365

11.  Debtors

	2022	2021
	£'000	£'000
Securities sold awaiting settlement	45	236
Dividends and interest receivable	793	1,143
Other debtors	15	10
	853	1,389

The directors consider that the carrying amount of debtors approximates to their fair value.

12.  Creditors: amounts falling due within one year

	2022	2021
	£'000	£'000
Bank loan	25,000	-
Securities purchased awaiting settlement	-	1,783
Other creditors and accruals	535	662
	25,535	2,445

The bank loan comprises a £25 million three-year term loan from Scotiabank Europe plc, expiring on 28 February 2023, carrying a fixed rate of interest of 1.546% per annum. The loan is unsecured but is subject to the usual undertakings and restrictions for a loan of this nature, and all of which have been complied with. The directors consider that the carrying amount of the loan approximates to its fair value.

The directors consider that the carrying amount of creditors falling due within one year approximates to their fair value.

13.  Creditors: amounts falling due after more than one year

	2022	2021
	£'000	£'000
Bank loan	-	25,000

The bank loan is now included in note 12 above, as it falls due within one year of the accounting date.

14.  Called-up share capital

	2022	2021
	£'000	£'000
Allotted, called-up and fully paid:
Ordinary shares of 25p each:
Opening balance of 35,066,190 (2021: same) shares, excluding shares held in treasury	8,766	8,766
Repurchase of 485,000 (2021: nil) shares into treasury	(121)	-
Subtotal of 34,581,190 (2021: 35,066,190) shares	8,645	8,766
1,562,500 (2021: 1,077,500) shares held in treasury	391	270
Closing balance1	9,036	9,036

¹ Represents 36,143,690 (2021: 36,143,690) shares of 25p each, including 1,562,500 (2021: 1,077,500,500) shares held in treasury. During the year, the Company purchased 485,000 of its own shares, nominal value £121,250 to hold in treasury for a total consideration of £2,675,000, representing 1.4% 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.

15.  Reserves

Year ended 30 September 2022

					Capital reserves
		Capital			Gains and	Investment
		redemp-		Share	losses on	holding
	Share	tion	Merger	purchase	sales of	gains and	Revenue
	premium1	reserve1	reserve1	reserve2	investments2	losses3	reserve4
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Opening balance	13,971	220	2,184	9,908	145,432	89,935	6,883
Gains on sales of investments based on the carrying value at the previous balance sheet date	-	-	-	-	4,342	-	-
Net movement in investment holding
gains and losses	-	-	-	-	-	(92,761)	-
Transfer on disposal of investments	-	-	-	-	12,932	(12,932)	-
Management fee allocated to capital	-	-	-	-	(1,136)	-	-
Special dividend allocated to capital	-	-	-	-	88	-	-
Finance costs allocated to capital	-	-	-	-	(271)	-	-
Repurchase of shares into treasury	-	-	-	(2,675)	-	-	-
Dividends paid	-	-	-	-	-	-	(5,586)
Retained revenue for the year	-	-	-	-	-	-	7,823
Closing balance	13,971	220	2,184	7,233	161,387	(15,758)	9,120

Year ended 30 September 2021

					Capital reserves
		Capital			Gains and	Investment
		redemp-		Share	losses on	holding
	Share	tion	Merger	purchase	sales of	gains and	Revenue
	premium1	reserve 1	reserve1	reserve2	investments2	losses3	reserve4
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Opening balance	13,971	220	2,184	9,908	140,314	17,666	6,225
Losses on sales of investments based on the carrying value at the previous balance sheet date	-	-	-	-	(3,030)	-	-
Net movement in investment holding
gains and losses	-	-	-	-	-	81,166	-
Transfer on disposal of investments	-	-	-	-	8,897	(8,897)	-
Management fee allocated to capital	-	-	-	-	(1,215)	-	-
Special dividend allocated to capital	-	-	-	-	736	-	-
Finance costs allocated to capital	-	-	-	-	(270)	-	-
Dividends paid	-	-	-	-	-	-	(4,664)
Retained revenue for the year	-	-	-	-	-	-	5,322
Closing balance	13,971	220	2,184	9,908	145,432	89,935	6,883

¹ These reserves are not distributable. The "Merger reserve" represents the premium over the nominal value of shares issued following a merger in 1989.

² These are realised (distributable) capital reserves which may be used to repurchase the Company's own shares or distributed as dividends. The "Share purchase reserve" is for the purpose of financing share buy-backs and was created following the cancellation of the "Warrant reserve" in 2003.

³ This reserve comprises holding gains on liquid investments (which may be deemed to be realised) and other amounts which are unrealised. An analysis has not been made between those amounts that are realised (and may be distributed as dividends or used to repurchase the Company's own shares) and those that are unrealised.

⁴ The revenue reserve may be distributed as dividends or used to repurchase the Company's own shares.

16.  Net asset value per share

	2022	2021
Net assets attributable to the Ordinary shareholders (£'000)	187,393	277,569
Shares in issue at the year end, excluding shares held in treasury	34,581,190	35,066,190
Net asset value per share	541.89p	791.56p

17.  Transactions with the Manager

Under the terms of the AlFM Agreement, the Manager is entitled to receive a management fee and a company secretarial fee. Details of the basis of these calculations are given in the Directors' Report above. Any investments in funds managed or advised by the Manager or any of its associated companies, are excluded from the assets used for the purpose of the management fee calculation and therefore incur no fee.

The management fee payable in respect of the year ended 30 September 2022 amounted to £1,623,000. (2021: £1,736,000) of which £340,000 (2021: £484,000) was outstanding at the year end. The secretarial fee payable for the year amounted to £144,000 (2021: £137,000) including VAT, of which £36,000 (2021: £34,000) was outstanding at the year end.

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

18.  Related party transactions

Details of the remuneration payable to directors are given in the Remuneration Report above and details of directors' shareholdings are given in the Remuneration Report above. Details of transactions with the Manager are given in note 17 above. There have been no other transactions with related parties during the year (2021: nil).

19.   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 Company's valuation policy are given in note 1(b) above.

At 30 September 2022, the Company's investments were all categorised in Level 1 (2021: same).

20.   Financial instruments' exposure to risk and risk management policies

The Company's investment objective is to invest in mid cap equities with the aim of providing a total return in excess of the FTSE 250 (ex-Investment Companies) Index. In pursuing this objective, the Company is exposed to a variety of financial risks that could result in a reduction in the Company's net assets or a reduction in the profits available for dividends.

These financial risks include market risk (comprising interest rate risk and other price risk), liquidity risk and credit risk. The directors' policy for managing these risks is set out below. The board coordinates the Company's risk management policy. The Company has no significant exposure to foreign exchange risk.

The objectives, policies and processes for managing the risks and the methods used to measure the risks that are set out below, have not changed from those applying in the comparative year.

The Company's classes of financial instruments are as follows:

-   investments in shares which are held in accordance with the Company's investment objective;

-   short-term debtors, creditors and cash arising directly from its operations; and

-   a sterling term loan with Scotiabank, the purpose of which is to assist with financing the Company's operations.

(a)  Market risk

The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises two elements: interest rate risk and other price risk. Information to enable an evaluation of the nature and extent of these two elements of market risk is given in parts (i) and (ii) of this note, together with sensitivity analyses where appropriate. The board reviews and agrees policies for managing these risks and these policies have remained unchanged from those applying in the comparative year. The Manager assesses the exposure to market risk when making each investment decision and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis.

(i)   Interest rate risk

Interest rate movements may affect the level of income receivable on cash deposits and the interest payable on any variable rate borrowings when interest rates are re-set. The Company's three-year term loan carries a fixed rate of interest and does not give rise to any interest rate risk.

Management of interest rate risk

Liquidity and borrowings are managed with the aim of increasing returns to shareholders. The board's policy is to permit gearing up to 25%, where gearing is defined as borrowings used for investment purposes less cash, expressed as a percentage of net assets.

Interest rate exposure

The exposure of financial assets and financial liabilities to floating interest rates, giving cash flow interest rate risk when rates are re-set, is shown below:

	2022	2021
	£'000	£'000
Exposure to floating interest rates:
Cash at bank and in hand	4,786	3,564
Total exposure	4,786	3,564

Cash balances earn interest at a floating rate based on the Sterling Overnight Index Average (2021: LIBOR).

The Company's revolving credit facility with Scotiabank Europe plc expires on 28 February 2023 and has a limit set at £25 million. The facility is unsecured but subject to covenants and restrictions which are customary for a facility of this nature. Interest is payable at a rate of LIBOR, or its replacement reference rate, as quoted in the market for the loan period, plus a margin, plus Mandatory Costs, which are the lender's costs of complying with certain regulatory requirements of the Bank of England. At 30 September 2022, the Company had drawn down the entire £25 million at an interest rate of 1.546%, repayable on 28 February 2023 (2021: same).

The above year end amounts are not representative of the exposure to interest rates during the year due to fluctuations in the level of cash balances. The maximum and minimum exposure during the year was as follows:

	2022	2021
	£'000	£'000
Minimum interest rate exposure during the year - net debt	(13,365)	(8,496)
Maximum interest rate exposure during the year - net debt	(22,681)	(21,436)

Interest rate sensitivity

The following table illustrates the sensitivity of the return after taxation for the year and net assets to a 1.0% (2021: 1.0%) increase or decrease in interest rates in regards to the Company's monetary financial assets and financial liabilities. This level of change is considered to be a reasonable illustration based on observation of current market conditions. The sensitivity analysis is based on the Company's monetary financial instruments held at the accounting date with all other variables held constant.

	2022		2021
	1.0% increase	1.0% decrease	1.0% increase	1.0% decrease
	in rate	in rate	in rate	in rate
	£'000	£'000	£'000	£'000
Income statement - return after taxation
Revenue return	48	(48)	36	(36)
Capital return	-	-	-	-
Total return after taxation	48	(48)	36	(36)
Net assets	48	(48)	36	(36)

In the opinion of the directors, this sensitivity analysis may not be representative of the Company's future exposure to interest rate changes due to fluctuations in the level of cash balances and drawings on the credit facility.

(ii)   Other price risk

Other price risk includes changes in market prices, other than those arising from interest rate risk, which may affect the value of investments.

Management of market price risk

The board meets on at least four occasions each year to consider the asset allocation of the portfolio and the risk associated with particular industry sectors. The investment management team has responsibility for monitoring the portfolio, which is selected in accordance with the Company's investment objective and seeks to ensure that individual stocks meet an acceptable risk/reward profile.

Market price risk exposure

The Company's total exposure to changes in market prices at 30 September comprises the following:

	2022	2021
	£'000	£'000
Investments held at fair value through profit or loss	207,289	300,061

The above data is broadly representative of the exposure to market price risk during the year.

Concentration of exposure to market price risk

An analysis of the Company's investments is given on page 10 of the full Annual Report and Accounts . The Company's investments are all listed in the United Kingdom. Accordingly there is a concentration of exposure to this country. However it should be noted that an investment may not be entirely exposed to the economic conditions in its country of listing.

Market price risk sensitivity

The following table illustrates the sensitivity of the return after taxation for the year and net assets to an increase or decrease of 20% (2021: 20%) in the fair values of the Company's investments. This level of change is considered to be a reasonable illustration based on observation of current market conditions. The sensitivity analysis is based on the Company's exposure through its investments and includes the impact on the management fee, but assumes that all other variables are held constant.

	2022		2021
	20% increase	20% decrease	20% increase	20% decrease
	in fair value	in fair value	in fair value	in fair value
	£'000	£'000	£'000	£'000
Income statement - return after taxation
Revenue return	(81)	81	(108)	108
Capital return	41,269	(41,269)	59,760	(59,760)
Total return after taxation and net assets	41,188	(41,188)	59,652	(59,652)
Percentage change in net asset value	22.0	(22.0)	21.5	(21.5)

(b)   Liquidity risk

This is the risk that the Company will encounter difficulty in meeting its obligations associated with financial liabilities that are settled by delivering cash or another financial asset.

Management of the risk

Liquidity risk is not significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding requirements if necessary.

Liquidity risk exposure

Contractual maturities of financial liabilities, based on the earliest date on which payment can be required are as follows:

	2022		2021
	Within		Within	One to
	one		one	two
	year	Total	year	years	Total
	£'000	£'000	£'000	£'000	£'000
Creditors: amounts falling due within one year
Securities purchased awaiting settlement	-	-	1,783	-	1,783
Other creditors and accruals	502	502	627	-	627
Other payables: drawings on the revolving credit facility (including interest)	25,160	-	-	-	-
Creditors: amounts falling due after more than one year
Other payables: drawings on the revolving credit facility (including interest)	-	-	422	25,155	25,577
	25,662	502	2,832	25,155	27,987

(c)   Credit risk

Credit risk is the risk that the failure of the counterparty to a transaction to discharge its obligations under that transaction could result in loss to the Company.

Management of credit risk

This risk is not significant and is managed as follows:

Portfolio dealing

The Company invests in markets that operate a "Delivery Versus Payment" settlement process which mitigates the risk of losing the principal of a trade during settlement. The Manager continuously monitors dealing activity to ensure best execution, which involves measuring various indicators including the quality of trade settlement and incidence of failed trades. Counterparties must be pre-approved by the Manager's credit committee.

Exposure to the Custodian

The custodian of the Company's assets is HSBC Bank plc which has Long-Term Credit Ratings of AA- with Fitch and Aa3 with Moody's. The Company's investments are held in accounts which are segregated from the custodian's own trading assets. If the custodian were to become insolvent, the Company's right of ownership of its investments is clear and they are therefore protected. However the Company's cash balances are all deposited with the custodian as banker and held on the custodian's balance sheet. Accordingly, in accordance with usual banking practice, the Company will rank as a general creditor to the custodian in respect of cash balances.

Credit risk exposure

The following amounts shown in the Statement of Financial Position, represent the maximum exposure to credit risk at the current and comparative year end.

	2022		2021
	Balance	Maximum	Balance	Maximum
	sheet	exposure	sheet	exposure
	£'000	£'000	£'000	£'000
Current assets
Debtors - securities sold awaiting settlement, dividends and interest receivable and other debtors	853	838	1,389	1,379
Cash at bank and in hand	4,786	4,786	3,564	3,564
	5,639	5,624	4,953	4,943

No debtors are past their due date and none have been written down or deemed to be impaired.

(d)   Fair values of financial assets and financial liabilities

All financial assets and liabilities are either carried in the Statement of Financial Position at fair value or the amount is a reasonable approximation of fair value.

21.   Capital management policies and procedures

The Company's objectives, policies and processes for managing capital are unchanged from the preceding year.

The Company's debt and capital structure comprises the following:

	2022	2021
	£'000	£'000
Debt
Bank loan	25,000	25,000
Equity
Called-up share capital	9,036	9,036
Reserves	178,357	268,533
	187,393	277,569
Total debt and equity	212,393	302,569

The Company's capital management objectives are to ensure that it will continue as a going concern and to maximise the capital return to its equity shareholders through an appropriate level of gearing.

The board's policy is to permit gearing up to 25% where gearing is defined as borrowings used for investment purposes less cash, expressed as a percentage of net assets. If the figure so calculated were to be negative, this would be shown as a "net cash" position.

	2022	2021
	£'000	£'000
Borrowings used for investment purposes, less cash	20,214	21,436
Net assets	187,393	277,569
Gearing	10.8%	7.7%

The board, with the assistance of the Manager, monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes:

-   the planned level of gearing, which takes into account the Manager's views on the market;

-   the need to buy back the Company's own shares for cancellation or to hold in treasury, which takes into account the share price discount;

-   the opportunities for issues of new shares; and

-   the amount of dividends to be paid, in excess of that which is required to be distributed.

22.   Events after the end of the reporting period

The market prices of the Company's investments have risen post the accounting date. As a result, the NAV per share was 639.3p and the share price was 553.0p as at close of business on 2 December 2022. This represents an increase of 18.0% and 15.2% in the NAV and share price respectively, versus that reported in the accounts.

Status of announcement

2021 Financial Information

Th e figures and financial information for 2021 are extracted from the published Annual Report and Accounts for the year ended 30 September 2021 and do not constitute the statutory accounts for that year. The 2021 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.

2022 Financial Information

The figures and financial information for 2022 are extracted from the Annual Report and Accounts for the year ended 30 September 2022 and do not constitute the statutory accounts for the year. The 2022 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 2022 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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