Final Results

RNS Number : 4166S

Schroder UK Mid Cap Fund PLC

21 December 2016

 

21 December 2016

ANNUAL REPORT AND ACCOUNTS

Schroder UK Mid Cap Fund plc (the "Company") hereby submits its annual financial report for the year ended 30 September 2016 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.1. 

The Company's Annual Report and Accounts for the year ended 30 September 2016 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website http://www.schroderukmidcapfund.com. Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/4166S_-2016-12-20.pdf

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

Enquiries:

Louise Richard

Schroder Investment Management Limited                      

Tel: [phone]

Schroder UK Mid Cap Fund plc

Chairman's Statement

Performance, revenue and dividends

As reported in my half year statement, performance during the first half of the year was affected by uncertain markets leading up to the UK's referendum on its membership of the EU. Immediately after the vote, mid cap share prices became exceptionally weak on concern about the implications for domestic growth. Subsequently, these fears have generally dissipated and mid cap share prices have recovered. In advance of the referendum we held net cash on our balance sheet and took advantage of lower stock prices by utilising limited gearing to add to our portfolio at that time.

During the year under review, the Company's net asset value produced a total return of 6.5%, compared to a total return of 8.6% for the Company's benchmark, the FTSE 250 (ex-Investment Companies) Index. This relative underperformance was largely attributable to our holdings of domestically-focused stocks which performed less well than those with a more export led turnover. For the most part, these companies have reported solid or strong trading updates, but the shares have nonetheless suffered in the months leading up to and immediately after the UK's referendum on EU membership amid fears about the UK's economic outlook. Many of those companies have raised their dividends by significant amounts reflecting underlying strong profit growth.

While performance lagged the benchmark, I am pleased to report a significant increase in income generated by the portfolio during the year under review: the revenue return per share increased by 25.5%, from 9.82 pence per share to 12.33 pence per share. Consequently, the Directors recommend the payment of a final dividend of 8.50 pence per share for the year ended 30 September 2016, which, together with the interim dividend of 2.75 pence per share paid during the year, brings total dividends for the year to 11.25 pence per share, an increase of 22.3% over dividends declared in respect of the previous financial year.

A resolution approving the payment of the final dividend for the year ended 30 September 2016 will be proposed at the forthcoming Annual General Meeting. If the resolution is passed, the dividend will be paid on 6 February 2017 to shareholders on the register on 30 December 2016.

Meanwhile, although the Company has underperformed the benchmark in recent years, its long term performance remains strong, having outperformed the benchmark over the 13 years since Schroders assumed the investment management mandate, as well as over five and 10 year periods to 30 September 2016.

The Manager's Review on pages 7 to 11 of the 2016 Annual Report provides greater detail on performance, market background and investment outlook for the Company.

Gearing facility

During the year, the Company renewed its £15 million revolving credit facility with Scotiabank (Europe) Plc. At the beginning of the year, the Company held net cash of 6.1%, which had changed to gearing of 1.5% at the year end.

The Board considers that the flexibility to utilise gearing remains an important tool in allowing the Manager to pursue investment opportunities when appropriate. To this end, parameters for the use of gearing have been established and these are reviewed regularly by the Board. The Company's gearing continues to operate within pre-agreed limits so that it does not represent more than 25% of total assets and facilities arranged represent an even smaller percentage.

Purchase of shares for cancellation and discount management

The share price produced a negative total return for the year of 4.0%, reflecting a significant widening of the Company's share price discount over the period from 9.3% to 18.3%. This widening is representative of a trend across UK-centric investment trusts in the sector, in part triggered by the results of the EU referendum. The average share price discount for the year was 13.6% and it ranged between 5.8% and 21.7%.

At the Company's last Annual General Meeting held on 10 February 2016, the Company was granted authority to purchase up to 14.99% of its issued share capital for cancellation or holding in Treasury. During the year ended 30 September 2016, the Company did not purchase any shares for cancellation or for holding in Treasury.

The decision whether to purchase shares is considered in Board discussions, particularly so this year in light of the wider discount. Whilst share buy-backs are one method of addressing discount levels, their effectiveness depends on the size and nature of the share register.

Your Board believes that the most sustainable way to close the share price discount is to increase demand for the Company's shares by effective marketing over the longer term, and a continuation of the Company's strong longer term performance track record. In the meantime, the Board will continue to consider on a regular basis whether share purchases should be made, alongside other means of discount control. To provide maximum flexibility for the future, it is proposed that the existing authority be renewed at the forthcoming Annual General Meeting.

Portfolio management team

We were pleased to announce in September 2016 that Jean Roche, a fund manager in Schroders' Pan-European Small and Mid Cap team, had been appointed as the Company's co-portfolio manager, joining lead portfolio manager Andy Brough. I reiterate my comment at the time that the Board is delighted by Jean's appointment. She and Andy work very well together as a team and her appointment as co-manager is a recognition of the relationship she and Andy have established on our Company's portfolio and her role in managing the assets.

Board refreshment

As previously announced and reported in my half year report, following Rachel Beagles's retirement as a Director at the Annual General Meeting held on 10 February 2016, Robert Talbut joined the Board as a non-executive Director with effect from the same date. A resolution for shareholders to appoint Mr Talbut as a Director of the Company will be proposed at the Annual General Meeting, details of which are set out at the end of this Statement. Mr Talbut's biographical details can be found on page 22 of the 2016 Annual Report.

These changes reflect the Board's policy to continue to refresh its membership on an ongoing basis. All members of the Board have now been appointed within the past six years and there are no plans for further changes within the foreseeable future.

Outlook

2016 has been unusual for the Company. We are fortunate in being able to say that its history in the last decade has been one not just of strong performance, but one driven by the success of the companies in the portfolio. This year, politics has had a disproportionate impact, as the EU referendum result and the subsequent fall in sterling has dominated the performance of mid cap shares relative to other UK equities.

This should not obscure, however, the continuing success of so many companies in the portfolio. As one measure, the dividends the Company has received from them has increased by a half in the last three years, against a backdrop of little macro-economic growth. We want our Manager to keep on targeting these successful businesses, and expect there to be many opportunities to do so in a world as diverse and exciting as that of UK mid caps.

Annual General Meeting

The Company's Annual General Meeting will be held at 12.00 noon on Tuesday, 31 January 2017 and shareholders are encouraged to attend. The meeting will include a presentation by the Manager on the prospects for the UK market and the Company's investment strategy.

Eric Sanderson

Chairman

20 December 2016

Manager's Review

Market background

As noted in the Chairman's Statement, the Company's net asset value produced a total return of 6.5% for the year ended 30 September 2016, compared to a total return of 8.6% for the benchmark, the FTSE 250 (ex-Investment Companies) Index. The Company's share price fell 4.0% over the year, with its discount to the net asset value widening from 9.3% to 18.3% (source: Morningstar, Schroders).

From 1 May 2003, when Schroders took responsibility for the management of the portfolio, to 30 September 2016, the net asset value produced a total return of 648.3%, compared to 470.7% from the chain-linked benchmark over the same period (source: Morningstar).

The benchmark's performance of 8.6% trailed that of the FTSE 100 Index, which returned 18.4% over the year. The reason for this divergence in performance was largely down to perceived future negative effects of June's EU referendum on the more domestic UK-facing FTSE 250 (ex-Investment Companies) Index (see graph on page 7 of the 2016 Annual Report). The UK's decision to leave the EU caused sterling to fall sharply and large caps, which have a greater proportion of non-sterling earnings than mid cap stocks, outperformed as a result. The FTSE 100 Index also benefited from a high weighting to internationally diversified defensive sectors (e.g. Tobacco and Pharmaceuticals) and from greater exposure to commodity stocks as underlying commodity prices began to rally.

Nonetheless, the FTSE 250 (ex-Investment Companies) Index grew dividends by c.15% in the period vs. FTSE 100 Index dividend growth of just c.4% (source: Thomson Reuters).

More generally, equities continued to be supported this year as central banks maintained accommodative monetary policy stances, amid recurring worries about the health of the global economy. The Bank of Japan, People's Bank of China, European Central Bank and Bank of England all eased further. Meanwhile, the US Federal Reserve deferred raising rates again following the anticipated 0.25% increase in December.

Having sold off in the run up to and immediate wake of the EU referendum, mid caps rallied towards the year end. Investors welcomed the appointment of Theresa May as Prime Minister, and were reassured by comments from the new Chancellor of the Exchequer, Philip Hammond, who said UK fiscal policy could be "reset" at the Autumn Statement to counteract any economic slowdown. The market was further supported as the Bank of England launched a series of monetary easing measures, which, while widely anticipated, were more extensive than expected.

Cyclical areas of the market outperformed amid a general return in risk appetite given the accommodative central bank policy backdrop. Many of the internationally-diversified midcap sectors, including industrials and resources, performed particularly well, in part as investors discounted the beneficial impact of sterling weakness to their overseas earnings bases. By contrast, many domestic-facing financials and other UK-orientated sectors such as house builders, retailers, travel and leisure and real estate, lagged, despite resilient trading updates and, more generally, strong dividend growth as mentioned above. This underperformance reversed somewhat towards the year end as the first economic data published following the unexpected "leave" decision suggested that the initial negative impact on UK growth had been less than feared.

Corporate activity, in terms of outright bids, was limited this year relative to last, but many mid cap companies executed bolt-ons or larger deals, for example Micro Focus, WS Atkins, Synthomer and Dechra Pharmaceuticals, all of which the Company owned for part or all of the year under review.

Portfolio performance

In line with the market commentary above, the underperformance relative to the benchmark was largely attributable to domestically-focused holdings. These included automotive retailer Lookers, gaming group Rank and housebuilder Redrow. For the most part, these companies have reported solid or strong trading updates, but the shares have nonetheless suffered in the months leading up to and immediately after the EU referendum amid fears about the UK's economic outlook. Meanwhile, Lookers, Rank and Redrow raised their dividends by 20%, 18% and 67% respectively, in contrast to much of the wider market, underpinned by rising streams of profits in all cases. More generally, your Company delivered earnings growth, driven primarily by dividends from the underlying holdings, of 26% relative to the benchmark's c.15%.

As in the first half of the financial year, the strongest positive contribution over the full year came from international veterinary products business Dechra Pharmaceuticals. The company has enjoyed stable growth of its animal drugs portfolio and strong performance in North America. The market also welcomed the purchase of Putney, a leading developer of generic companion animal pharmaceuticals in the US.

Many of our other internationally diversified companies performed well, for example software and IT services provider Micro Focus (c.95% ex-UK revenues), domestic home repairs and insurance provider HomeServe (c.55% ex-UK revenues) and specialist provider of marine services James Fisher (c.60% ex-UK revenues). The market rewarded underlying growth and was also willing to attribute an additional premium to expectations of future benefit from overseas earnings exposure, relative to more domestically-focused holdings.

There were however positive contributions from not holding stocks such as post-merger betting and gaming company Paddy Power Betfair, and London-exposed real estate companies Capital & Counties and Derwent London. Not owning supermarket group Wm Morrison detracted from performance, as did the decision not to hold Rentokil Initial. From a sector perspective, our underweight position in mining and industrial groups negatively impacted performance as the market rotated into these stocks despite a failure to meet market forecasts in many cases.

Portfolio activity

We initiated a new holding in online car classifieds business Auto Trader in November 2015. As the market leader, the company is well positioned to generate revenue from its data sources and drive up average revenue per retailer. We also bought self storage provider Safestore in the same month and added throughout the first quarter of 2016. We believe that the company has considerable growth potential in both the UK and France (in Paris), where occupancy levels and pricing can be driven up.

In January we established a new holding in specialist buy-to-let lender Paragon, which we viewed as oversold following taxation and regulatory changes. We added to the position throughout the first half of 2016, due to our belief that the market will continue to see growth thanks to favourable supply and demand demographics in the UK.

Dunelm Group (a homewares retailer) was added in April. This organic growth story is driven by new space, margin gains and, more recently, new merchandising initiatives, which are driving improved sales per square foot. The company, which is highly cash-generative, is benefiting from a fresh pair of eyes in the form of new CEO John Browett (formerly at Dixons and Apple). We also bought into Cranswick (a pork and poultry processor), which has strong relationships across all supermarket chains, including the discounters and the higher end, is partially protected from pork prices through partial vertical integration and longer dated contracts with its customers, and is investing internally generated cash into the high-growth poultry market.

After the referendum we initiated a position in cash-rich Howden Joinery (manufacturer and supplier of kitchens) at a depressed valuation. We initiated a new position in sports retailer JD Sports, which has strong relationships with suppliers, particularly Nike and Adidas, whose products it sells to relatively less price-sensitive customers, and which is exploring international growth avenues. Finally, we added to existing holdings such as alternative asset manager Intermediate Capital Group, since we think that demand for yield in a low interest rate environment will continue to drive growth in assets under management.

We sold out of business service provider MITIE and funeral provider Dignity in April and May respectively. The sale of the former was due to observed weakness across sector peers and likely cost pressure from the National Minimum Wage, and the latter due to concerns around higher death rates in previous periods, resulting in difficult comparables.

We exited our position in Micro Focus in September, taking profits after the share performance discussed above and the company's promotion to the FTSE 100 Index. Other sales include performance materials company Alent following its acquisition by Platform Specialty Products in November 2015, and support services group DCC due to its promotion to the FTSE 100 Index towards the end of 2015. We exited Cable & Wireless Communications in January following a recommended offer for the company from European cable group Liberty Global.

Outlook

A number of macroeconomic data points (GDP, consumer confidence, the Purchasing Managers' Index) have emerged after the referendum suggesting that the immediate shift down by the markets was an over-reaction. Whether the Bank of England should take credit for this apparent soft landing is a moot point, but the fact that both the FTSE 100 Index and the FTSE 250 Index are trading above pre-referendum levels suggests that the market is now more willing to believe that economic activity will be only marginally negatively affected by the Brexit process. The market has been inclined to reward overseas earners with higher ratings after the referendum, whilst ignoring in some cases stronger fundamentals from domestic-facing companies. We will seek to exploit opportunities presented by this mismatch.

Bid activity has been relatively limited this year so it is possible that pent-up demand from overseas acquirers for UK mid caps will be released in the year ahead, underpinned by weaker sterling.

The FTSE 250 Index continues to deliver dividend growth which is significantly better than that of the FTSE 100 Index. The latter is currently distributing c.70% of its earnings compared with c.48% for the former. This suggests that the outperformance of the FTSE 250 Index can continue, given the higher level of dividend cover for the FTSE 250 constituents.

The Company is currently 1.3% geared, having taken advantage of the depressed valuations of some companies following the referendum. However, current valuations, broadly in line with their long term average, make it unlikely that net gearing will increase.

Our investment strategy

Although UK consumer sentiment appears to be holding up relatively well, we remain alert to the risk that imported inflation may begin to erode earnings power in the UK, and we therefore aim to direct our domestically-focused investments towards companies with pricing power, strong balance sheets, and in sectors seeing structural growth.

Without doubt the uncertainty about the UK's economic outlook will result in some investment decisions being delayed and a lot of companies are going to struggle. However, for well-financed businesses with strong market positions this could create opportunities. This is particularly true of companies where management is well aligned with investors' interests due to large shareholdings.

The majority of our most overweight holdings, listed on page 11 of the 2016 Annual Report, have seen both profits and dividend upgrades over the course of the past year. We continue to expect that our portfolio holdings are well positioned to generate superior long-term returns as they deliver a rising stream of earnings to underpin progressive dividend policies.

Team changes

Changes in the investment team during the year under review are outlined in the Strategic Report on page 14 of the 2016 Annual Report.  The team's investment philosophy continues as before: concentrating on companies with strong management teams with a proven record, good future prospects and a strong business franchise within their markets.

Schroder Investment Management Limited

20 December 2016

Principal risks and uncertainties

The Board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The Board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the Audit 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 its strategic objectives. Both the principal risks and the monitoring system are also subject to robust review at least annually. The last review took place in November 2016.

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.

A summary of the principal risks and uncertainties faced by the Company, which have remained unchanged throughout the year, and actions taken by the Board and, where appropriate, its Committees, to manage and mitigate these risks and uncertainties, is set out below.

Risk Strategic risk The Company's investment objectives may become out of line with the requirements of investors, resulting in a wide discount of the share price to underlying net asset value.	Mitigation and Management Appropriateness of the Company's investment remit periodically reviewed and success of the Company in meeting its stated objectives is monitored. Share price relative to net asset value monitored and use of buy back authorities considered on a regular basis. Marketing and distribution activity is actively reviewed.
The Company's cost base could become uncompetitive, particularly in light of open ended alternatives.	Ongoing competitiveness of all service provider fees subject to periodic benchmarking against competitors. Annual consideration of management fee levels.
Investment management risk 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 the agreed investment restrictions, investment performance and risk against investment objectives and strategy; relative performance; the portfolio's risk profile; and appropriate strategies employed to mitigate any negative impact of substantial changes in markets. Annual review of the ongoing suitability of the Manager.
Financial The Company is exposed to the effect of market fluctuations due to the nature of its business. A significant fall in equity markets could have an adverse impact on the market value of the Company's underlying investments.	Risk profile of the portfolio considered and appropriate strategies to mitigate any negative impact of substantial changes in markets discussed with the Manager.
Custody risk Safe custody of the Company's assets may be compromised through control failures by the Depositary, including cyber hacking.	Depositary reports on safe custody of the Company's assets, including cash and portfolio holdings, are independently reconciled with the Manager's records. Review of audited internal controls reports covering custodial arrangements. Annual report from the Depositary on its activities, including matters arising from custody operations.
Gearing and leverage risk 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. Accounting, legal and regulatory risk In order to continue to qualify as an investment trust, the Company must comply with the requirements of Section 1158 of the Corporation Tax Act 2010. 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.	Gearing is monitored and strict restrictions on borrowings imposed: gearing continues to operate within pre-agreed limits so as not to exceed 25% of total assets. Confirmation of compliance with relevant laws and regulations by key service providers. Shareholder documents and announcements, including the Company's published Annual Report, are subject to stringent review processes. Procedures have been established to safeguard against disclosure of inside information.
Service provider risk The Company has no employees and has delegated certain functions to a number of service providers. Failure of controls and poor performance of any service provider could lead to disruption, reputational damage or loss.	Service providers appointed subject to due diligence processes and with clearly-documented contractual arrangements detailing service expectations. Regular reporting by key service providers and monitoring of the quality of services provided. Review of annual audited internal controls reports from key service providers, including confirmation of business continuity arrangements.

Risk assessment and internal controls

Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the Audit 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 Committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this Report.

A full analysis of the financial risks facing the Company is set out in note 19 on pages 49 to 53 of the 2016 Annual Report.

Going concern

Having assessed the principal risks and the other matters discussed in connection with the viability statement set out on page 20 of the 2016 Annual Report, and the "Guidance on Risk Management, Internal Control and Related Financial and Business Reporting" published by the Financial Reporting Council ("FRC") in 2014, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Statement of Directors' responsibilities

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

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising Financial Reporting Standard (FRS)102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" and applicable law). 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 return 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 judgments and accounting estimates that are reasonable and prudent;

•        state whether applicable UK Accounting Standards, comprising FRS102, have been followed, subject to any material departures disclosed and explained in the financial statements;

•        notify the Company's shareholders in writing about the use of disclosure exemptions in FRS102, used in the preparation of financial statements; and

•        prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Manager is responsible for the maintenance and integrity of the Company's webpage. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed on pages 21 and 22 of the 2016 Annual Report, confirm that to the best of their knowledge:

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

•        the Strategic Report contained in the 2016 Report and Accounts includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces; and

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

Income Statement    

for the year ended 30 September 2016

	2016			2015
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair value through profit or loss	-	7,975	7,975	-	10,652	10,652
Income from investments	5,320	361	5,681	4,397	674	5,071
Other interest receivable and similar income	3	-	3	3	-	3
Gross return	5,323	8,336	13,659	4,400	11,326	15,726
Investment management fee	(387)	(904)	(1,291)	(372)	(869)	(1,241)
Administrative expenses	(475)	-	(475)	(485)	-	(485)
Net return before finance costs and taxation	4,461	7,432	11,893	3,543	10,457	14,000
Finance costs	(6)	(13)	(19)	-	-	-
Net return on ordinary activities before taxation	4,455	7,419	11,874	3,543	10,457	14,000
Taxation on ordinary activities	-	-	-	6	-	6
Net return on ordinary activities after taxation	4,455	7,419	11,874	3,549	10,457	14,006
Return per share	12.33p	20.53p	32.86p	9.82p	28.93p	38.75p

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 items of other comprehensive income, and therefore the net return on ordinary activities after taxation is also the total comprehensive income for the year.

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

Statement of Changes in Equity

for the year ended 30 September 2016

	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 2014	9,036	13,971	220	2,184	15,477	127,847	4,592	173,327
Net return on ordinary activities	-	-	-	-	-	10,457	3,549	14,006
Dividends paid in the year	-	-	-	-	-	-	(3,073)	(3,073)
At 30 September 2015	9,036	13,971	220	2,184	15,477	138,304	5,068	184,260
Net return on ordinary activities	-	-	-	-	-	7,419	4,455	11,874
Dividends paid in the year	-	-	-	-	-	-	(3,416)	(3,416)
At 30 September 2016	9,036	13,971	220	2,184	15,477	145,723	6,107	192,718

Statement of Financial Position

at 30 September 2016

	2016	2015
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	194,912	173,171
Current assets
Debtors	1,088	490
Cash at bank and in hand	1,193	11,180
	2,281	11,670
Current liabilities
Creditors: amounts falling due within one year	(4,475)	(581)
Net current (liabilities)/assets	(2,194)	11,089
Net assets	192,718	184,260
Capital and reserves
Called-up share capital	9,036	9,036
Share premium	13,971	13,971
Capital redemption reserve	220	220
Merger reserve	2,184	2,184
Share purchase reserve	15,477	15,477
Capital reserves	145,723	138,304
Revenue reserve	6,107	5,068
Total equity shareholders' funds	192,718	184,260
Net asset value per share	533.20p	509.80p

Notes to the Accounts

1.         Accounting Policies

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP") and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the "SORP") issued by the Association of Investment Companies in November 2014 and which superseded the SORP issued in January 2009. 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 at fair value through profit or loss.

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

The Company has adopted Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" and the amended SORP, both of which became effective for periods beginning on or after 1 January 2015. FRS 102 replaces all existing standards applicable to the Company's accounts. As a result there are some presentational changes to the accounts but no change in the way numbers are measured. The adoption of FRS 102 has not affected the reported financial position or financial performance of the Company.

The changes to these accounts arising from FRS 102 and the amended SORP may be summarised briefly as follows:

•        the reconciliation of movements in shareholders' funds has been renamed "Statement of Changes in Equity";

•        the balance sheet has been renamed "Statement of Financial Position";

•        the Company no longer presents a statement of cash flows or the two related notes, as it is no longer required for an investment company which meets certain specified conditions; and

•        footnotes have been added to note 14 to the accounts on page 48 of the 2016 Annual Report, indicating which of the Company's reserves are regarded as distributable.

Other than these changes, the accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 30 September 2015.

The Company has early adopted an amendment to paragraph 34.22 of FRS 102, issued by the Financial Reporting Council in March 2016 regarding the categorisation of financial instruments into the fair value hierarchy in note 18 to the accounts on page 49 of the 2016 Annual Report. As a result of this amendment, the criteria used to allocate financial instruments into the three levels remain unchanged from prior years.

2.         Taxation on ordinary activities

	2016	2015
	£'000	£'000
(a) Analysis of tax charge in the year: Irrecoverable overseas tax
	-	(6)
Total tax charge for the year	-	(6)

(b)        Factors affecting tax charge for the year

The tax assessed for the year is lower (2015: lower) than the Company's applicable rate of corporation tax for the year of 20.0% (2015: 20.5%).

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

	2016			2015
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Net return on ordinary activities before taxation	4,455	7,419	11,874	3,543	10,457	14,000
Net return on ordinary activities multiplied by the Company's applicable rate of corporation tax for the year of 20.0% (2015: 20.5%)	891	1,484	2,375	726	2,144	2,870
Effects of:
Capital returns on investments	-	(1,595)	(1,595)	-	(2,184)	(2,184)
Income not chargeable to corporation tax	(1,015)	(72)	(1,087)	(891)	(138)	(1,029)
Unrelieved expenses	124	183	307	165	178	343
Irrecoverable overseas tax	-	-	-	(6)	-	(6)
Tax charge for the year	-	-	-	(6)	-	(6)

(c)        Deferred taxation

The Company has an unrecognised deferred tax asset of £4,635,000 (2015: £4,839,000) based on a prospective corporation tax rate of 18% (2015: 20%). The reduction in the standard rate of corporation tax was substantively enacted in October 2015 and is effective from 1 April 2020.

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.

3.         Dividends

(a)        Dividends paid and declared

	2016 £'000	2015 £'000
2015 final dividend of 6.70p (2014: 6.00p) paid out of revenue profits	2,422	2,169
Interim dividend of 2.75p (2015: 2.50p) paid out of revenue profits	994	904
Total dividends paid in the year	3,416	3,073

	2016 £'000	2015 £'000
2016 final dividend declared of 8.50p (2015: 6.70p) to be paid out of revenue profits	3,072	2,422

(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 £4,455,000 (2015: £3,549,000).

	2016 £'000	2015 £'000
Interim dividend of 2.75p (2015: 2.50p)	994	904
Final dividend of 8.50p (2015: 6.70p)	3,072	2,422
	4,066	3,326

4.         Return per share

	2016 £'000	2015 £'000
Revenue return	4,455	3,549
Capital return	7,419	10,457
Total return	11,874	14,006
Weighted average number of Ordinary shares in issue during the year	36,143,690	36,143,690
Revenue return per share	12.33p	9.82p
Capital return per share	20.53p	28.93p
Total return per share	32.86p	38.75p

5.         Called-up share capital

	2016	2015
Ordinary shares allotted, called-up and fully paid:
36,143,690 (2015: 36,143,690) shares of 25p each	9,036	9,036

6.         Net asset value per share

	2016	2015
Net assets attributable to the Ordinary shareholders (£'000)	192,718	184,260
Ordinary shares in issue at the year end	36,143,690	36,143,690
Net asset value per share	533.20p	509.80p

7.         Disclosures regarding financial instruments measured at fair value

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

FRS 102 requires financial instruments to be categorised into a hierarchy consisting of the three levels below. Note that the criteria used to categorise investments include an amendment to paragraph 34.22 of FRS 102, issued by the Financial Reporting Council in March 2016, and which the Company has early adopted.

Level 1 - valued using unadjusted quoted prices in active markets for identical assets.

Level 2 - valued using observable inputs other than quoted prices included within Level 1.

Level 3 - valued using inputs that are unobservable.

Details of the valuation techniques used by the Company are given in note 1(b) on page 43 of the 2016 Annual Report.

At 30 September 2016, all investments in the Company's portfolio are categorised as Level 1 (2015: same).

8. Status of announcement

2015 Financial Information

The figures and financial information for 2015 are extracted from the published Annual Report and Accounts for the year ended 30 September 2015 and do not constitute the statutory accounts for that year. The 2015 Annual Report and Accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditor which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2016 Financial Information

The figures and financial information for 2016 are extracted from the Annual Report and Accounts for the year ended 30 September 2016 and do not constitute the statutory accounts for the year. The 2016 Annual Report and Accounts include the Report of the Independent Auditor which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The 2016 Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

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

 

END

 

 

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