Half-yearly Report
Montanaro UK Smaller Companies Investment Trust PLC ("MUSCIT" or the "Company")
Half-yearly Report for the six months ended 30 September 2013
MUSCIT was launched in March 1995 and is listed with the UKLA and its shares
are traded on the London Stock Exchange.
Investment Objective
The investment objective is capital appreciation through investing in small
quoted companies listed on the London Stock Exchange or traded on the
Alternative Investment Market ("AIM") and to achieve relative outperformance of
its benchmark, the Numis Smaller Companies Index (excluding Investment
Companies) ("NSCI")*.
No unquoted investments are permitted.
Investment Policy
The Company seeks to achieve its objective and to diversify risk by investing
in a portfolio of quoted UK smaller companies. At the time of initial
investment, a potential investee company must be profitable and smaller than
the largest constituent of the NSCI, which represents the smallest 10% of the
UK Stock Market by value.
In order to manage risk, the Manager will normally limit any one holding to a
maximum of 4% of the Company's investments. The portfolio weighting of each
investment is closely monitored to reflect the underlying liquidity of the
particular company. The Company's AIM exposure is also closely monitored by the
Board and is limited to 30% of total investments, with Board approval required
for exposure to be above 25%.
The Manager is focused on identifying high quality companies operating in
growth markets. This typically leads the Manager to invest in companies that
enjoy high barriers to entry, pricing power, a sustainable competitive
advantage and strong management teams. The portfolio is therefore constructed
on a "bottom up" basis and there are no sectoral constraints placed on the
Manager.
The Board, in consultation with the Manager, is responsible for determining the
gearing strategy of the Company. Gearing is used to enhance returns when the
timing is considered appropriate. The Company currently has a credit facility
of £15 million through ING Bank of which £15 million was drawn as at
30 September 2013. The Board has agreed to limit borrowings to 25% of
shareholders' funds.
Change in Investment Manager's fee
The Company is pleased to announce that, with effect from 1 April 2014, the
investment management fee will decrease from 1% p.a. to 0.85% p.a. of gross
assets. In addition, the performance fee will be removed. Your Board believes
that these fee reductions will provide a more competitive and simpler
management fee structure. In addition, this will make fee comparisons with
other investment vehicles easier. Montanaro Asset Management Limited
("Montanaro") has a very successful long-term track record as an independent
quoted small company specialist investing in high quality growth companies.
Investment ideas for MUSCIT will continue to be generated internally by
Montanaro through detailed and skilled due diligence on companies they consider
to be undervalued.
Highlights
for the six months to 30 September 2013
Results
Total Return
Net Asset Value ("NAV") +4.0% (£182 million)
Gross Assets: +2.4% (£198 million)
Share Price: +12.8%
Gross Gearing: 8.2%
Net Gearing: 1.4%
Benchmark* (NSCI Total Return): +12.5%
Capital Return
As at As at
30 September 31 March
2013 2013 % Change
NAV per Ordinary share (excluding
current period revenue): 538.08p 522.17p 3.1
Ordinary share price: 486.00p 437.00p 11.2
Benchmark* (NSCI Capital Return): 6,125.54 5,541.17 10.5
NAV Performance vs Benchmark*
(to 30 September 2013)
Since
inception
6 months 3 years 5 years March 1995
% % % %
NAV (excluding current period
revenue) 3.1 49.3 110.7 445.8
Benchmark* 10.5 40.4 61.0 97.3
(Underperformance)/
outperformance (7.4) 8.9 49.7 348.5
* Previous benchmark of FTSE SmallCap (excluding Investment Companies) to
31 March 2013 and Numis Smaller Companies Index (excluding Investment Companies)
from 1 April 2013.
Capital Structure
As at 30 September 2013, the Company had 33,475,958 Ordinary shares of 10p each
in issue (none of which were held in Treasury). Holders of Ordinary shares have
unrestricted voting rights of one vote per share at all general meetings of the
Company.
Manager's Review
The last six months have brought confirmation that central bankers in the
developed world are the new rainmakers, waving their magic wands in ever more
creative ways to keep investors happy. There is little doubt that the Bank of
England, the Federal Reserve and the Bank of Canada have brought considerable
innovation to the world of monetary policy since 2008 and have played a key
role in the revival of equity markets. More recently, shortly after the
Federal Reserve began to voice second thoughts about its Quantitative Easing
programme, Mr Carney and Mr Draghi introduced forward guidance to lower
interest rate expectations. Global equity markets applauded and pursued their
upward march.
The positive momentum of UK equities was maintained throughout the period as
investors continued to reappraise UK equity risk in the face of the
constructive macroeconomic news flow. The closely-watched Purchasing Managers'
Index climbed to a 31-month high in August 2013 and remained broadly stable in
September 2013. The employment component of the index also showed that British
factories are hiring at the fastest pace since May 2011. The recovery of the
Euro Zone, the UK's largest trading partner, has raised hopes of an
acceleration of export growth. Meanwhile, house prices have reached new highs,
buoyed by the Government's "Help to Buy" schemes, creating a wealth effect that
may encourage further consumer spending. There is little doubt that consumer
confidence has improved.
The revival of the British economy, coupled with easier financial conditions
for borrowers, produced a favourable backdrop for quoted smaller companies to
maintain their leadership in the Stock Market. The NSCI rose by 10.5% over the
six month period ending 30 September 2013, outperforming the FTSE 100 index by
a remarkable 9.8% margin. Meanwhile, the NAV (excluding current period
revenue) of the Company gained 3.1%, compared to 1.9% for the FTSE All-Share,
but well below the NSCI benchmark index.
Outlook
As often happens when investor confidence returns and we enjoy a period of
"risk on", our "quality growth" investment style has been out of favour since
the middle of 2012. We have suffered from the strong rotation into SmallCap
Value, high beta, low quality and cyclical stocks. The large underweight to
the consumer, a sector where we traditionally find it more difficult to
discover very high quality businesses with sustainable competitive advantages
that can be held for the long-term, has also been partly responsible for the
underperformance.
Such periods of marked underperformance of MUSCIT are rare but they are a
natural by-product of our long-term "Buy & Hold" investment strategy focused
exclusively on high quality businesses. The consistency of our strategy has
enabled MUSCIT to generate a capital return of 13.2% p.a. (after fees) over the
ten year period ending 30 September 2013, significantly ahead of the NSCI
benchmark index which saw returns of 10.2% p.a.
As we enter the final quarter of 2013, we are seeing SmallCap Value stocks lose
a little steam after a phenomenal run that resulted in an outperformance of
32% relative to growth over the past 16 months (source: Numis). To us, this
suggests that we are slowly moving to the next phase of the Bull Market that
would typically be led by growth and quality companies. Having reduced our
underweight to the consumer sectors to approximately 8%, we feel comfortable
with the positioning of the Company and do not anticipate material changes to
the portfolio in the coming quarter. We expect to increase the level of
gearing gradually over the quarter and look forward to the second half of the
year.
Montanaro Asset Management Limited
28 November 2013.
Investment Portfolio
as at 30 September 2013
Market
Holding Sector Value % of cap
£'000 portfolio £m
Devro Food Producers 5,938 3.2 541
Domino's Pizza Travel and Leisure 5,723 3.1 961
Mears Group Support Services 5,665 3.1 419
Consort Medical Health Care Equipment and
Services 5,568 3.0 255
Victrex Chemicals 4,976 2.7 1,354
Dechra Pharmaceuticals and
Pharmaceuticals Biotechnology 4,739 2.6 626
James Fisher Industrial Transportation 4,667 2.5 531
Berendsen Support Services 4,175 2.3 1,565
Jupiter Fund
Management General Financials 4,110 2.2 1,680
Dialight Electronic and Electrical
Equipment 4,109 2.2 367
Brewin Dolphin General Financials 4,061 2.2 739
Latchways Support Services 3,927 2.1 145
Big Yellow Group Real Estate/Real Estate
Investment Trusts 3,872 2.1 622
Shaftesbury Real Estate/Real Estate
Investment Trusts 3,864 2.1 1,489
RPS Group Support Services 3,806 2.1 590
Cranswick Food Producers 3,781 2.1 572
NCC Group Software and Computer Services 3,780 2.1 308
Marshalls Construction and Materials 3,754 2.0 352
Helical Bar Real Estate/Real Estate
Investment Trusts 3,712 2.0 351
Brammer Support Services 3,670 2.0 541
Twenty Largest Holdings 87,897 47.7
Senior Aerospace and Defence 3,664 2.0 1,125
Genus Pharmaceuticals and
Biotechnology 3,652 2.0 872
AG Barr Beverages 3,587 1.9 616
N Brown General Retailers 3,570 1.9 1,488
Telecity Group Software and Computer Services 3,544 1.9 1,682
Halma Electronic and Electrical
Equipment 3,541 1.9 2,142
Clarkson Industrial Transportation 3,487 1.9 427
EnQuest Oil and Gas Producers 3,456 1.9 1,047
Bovis Homes Household Goods and Home
Construction 3,451 1.9 964
Fenner Industrial Engineering 3,409 1.9 772
Domino Printing Electronic and Electrical
Sciences Equipment 3,328 1.8 718
Cineworld Travel and Leisure 3,322 1.8 569
Carclo Chemicals 3,230 1.7 251
Croda International Chemicals 3,186 1.7 3,605
Hilton Food Food Producers 3,078 1.7 310
Renishaw Electronic and Electrical
Equipment 3,065 1.7 1,312
Aveva Group Software and Computer Services 2,988 1.6 1,659
Rathbone Brothers General Financials 2,862 1.6 716
Hunting Oil Equipment Services and
Distribution 2,811 1.5 1,177
KCOM Group Fixed Line Telecommunications 2,730 1.5 470
Restaurant Group Travel and Leisure 2,713 1.5 1,067
Ted Baker Personal Goods 2,631 1.4 836
Anite Software and Computer Services 2,527 1.4 338
Dignity General Retailers 2,328 1.3 771
Dunelm Group General Retailers 2,315 1.3 1,872
Xaar Electronic and Electrical
Equipment 2,314 1.3 602
Innovation Group Software and Computer Services 2,135 1.2 289
Ocean Wilson Holdings Industrial Transportation 2,103 1.1 336
Telecom Plus Fixed Line Telecommunications 2,089 1.1 897
Wilmington Group Media 1,884 1.0 174
Diploma Support Services 1,866 1.0 739
Fidessa Group Software and Computer Services 1,718 0.9 747
Paypoint Support Services 1,464 0.8 721
Games Workshop Leisure Goods 1,441 0.8 261
Euromoney
Institutional
Investor Media 751 0.4 1,467
Total Holdings 184,137 100.0
Analysis of Investment Portfolio by FTSE Classification
as at 30 September 2013
Classification % of portfolio
FTSE 100 1.7
FTSE 250* 7.1
Numis Smaller Companies 91.2
AIM 0.0
* represents those holdings that are in the FTSE 250 and are above the
threshold for Numis Smaller Companies holdings.
Interim Management Report and Responsibility Statement
Interim Management Report
The important events that have occurred during the period under review and the
key factors influencing the financial statements are set out in the Manager's
Review.
The principal risks and uncertainties for the remaining six months of the
financial year are reviewed in the Outlook section of the Manager's Review. The
Company actively monitors its counterparty exposures and has been particularly
vigilant during the period.
The principal risks facing the Company are substantially unchanged since the
date of the Annual Report for the year ended 31 March 2013 and continue to be
as set out in that report on pages 14 to 16 and pages 37 to 39.
Risks faced by the Company include, but are not limited to, Investment Manager,
investment and strategy, portfolio liquidity, liquidity of MUSCIT shares,
discount volatility, credit risk, market price risk, interest rate risk, Share
liquidity risk, gearing, regulatory risk, operational risk, financial risk,
banking, reputational and Company viability.
Under the Listing Rules the Manager is regarded as a related party of the
Company. The amounts paid to the Manager during the period were £956,000 (six
months to 30 September 2012: £1,075,000; year to 31 March 2013: £1,714,000). At
30 September 2013, the amount due to Montanaro, included in creditors, was
£227,000.
However, the existence of an independent Board of Directors demonstrates that
the Company is free to pursue its own financial and operating policies.
Therefore, in terms of FRS 8 "Related Party Transactions", the Manager is not
considered a related party.
Responsibility Statement
The Directors confirm that to the best of their knowledge:
â— The condensed set of financial statements has been prepared in accordance
with the Statement `Half-Yearly Financial Reports' issued by the UK Accounting
Standards Board and gives a true and fair view of the assets, liabilities,
financial position and profit of the Company;
â— The Manager's Review (constituting the interim management report) includes a
fair review of the information required by DTR 4.2.7R of the Disclosure and
Transparency Rules, being an indication of important events that have occurred
during the first six months of the financial year and their impact on the
condensed set of financial statements;
â— The statement of principal risks and uncertainties for the remaining six
months of the financial year above is a fair review of the information required
by DTR 4.2.7R; and
â— The financial statements include a fair review of the information required by
DTR 4.2.8R of the Disclosure and Transparency Rules, being related party
transactions that have taken place in the first six months of the current
financial year and that have materially affected the financial position or
performance of the Company during that period, and any changes in the related
party transactions described in the last Annual Report that could do so.
This Half-yearly Report was approved by the Board of Directors on 28 November
2013 and the above Responsibility Statement was signed on its behalf by Kathryn
Matthews, Chairman.
Income Statement (unaudited)
for the six months to 30 September 2013
6 months to 30 September 2013 6 months to 30 September 2012 Year to 31 March 2013
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains on
investments
designated at fair
value through
profit or loss - 5,604 5,604 - 10,106 10,106 - 32,574 32,574
Dividends and
interest 2,760 - 2,760 2,209 - 2,209 3,844 - 3,844
Management fee (478) (478) (956) (409) (409) (818) (857) (857) (1,714)
Management
performance fee - - - - (256) (256) - - -
Other expenses (208) - (208) (173) - (173) (315) - (315)
Movement in fair
value of derivative
financial
instruments - 276 276 - (423) (423) - (479) (479)
Net return before
finance costs and
taxation 2,074 5,402 7,476 1,627 9,018 10,645 2,672 31,238 33,910
Interest payable
and similar charges (162) (162) (324) (161) (162) (323) (322) (322) (644)
Net return before
taxation 1,912 5,240 7,152 1,466 8,856 10,322 2,350 30,916 33,266
Taxation (Note 2) - - - - - - - - -
Net return after
taxation 1,912 5,240 7,152 1,466 8,856 10,322 2,350 30,916 33,266
Return per Ordinary
share 5.71p 15.65p 21.36p 4.38p 26.45p 30.83p 7.02p 92.35p 99.37p
The total column of this statement is the profit and loss account of the
Company. The supplementary revenue and capital columns are presented under
guidance issued by the Association of Investment Companies.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the period.
No Statement of Total Recognised Gains and Losses has been prepared as all such
gains and losses are shown in the Income Statement.
Reconciliation of Movements in Shareholders' Funds (unaudited)
for the six months to 30 September 2013
Total
Called-up Share Capital Distributable equity
share premium redemption Special Capital revenue shareholders'
6 months to capital account reserve reserve reserve reserve funds
30 September 2013 £'000 £'000 £'000 £'000 £'000 £'000 £'000
As at 1 April 2013 3,348 19,307 1,362 4,642 144,259 4,233 177,151
Fair value movement
of investments - - - - 5,604 - 5,604
Costs allocated to
capital - - - - (640) - (640)
Net revenue for the
period - - - - - 1,912 1,912
Movement in fair
value of derivative
financial
instruments - - - - 276 - 276
Dividends paid in
period - - - - - (2,263) (2,263)
As at 30 September
2013 3,348 19,307 1,362 4,642 149,499 3,882 182,040
6 months to 30 September 2012
As at 1 April 2012 3,348 19,307 1,362 4,642 113,343 4,146 146,148
Fair value movement
of investments - - - - 10,106 - 10,106
Costs allocated to
capital - - - - (827) - (827)
Net revenue for the
period - - - - - 1,466 1,466
Movement in fair
value of derivative
financial
instruments - - - - (423) - (423)
Dividends paid in
period - - - - - (2,263) (2,263)
As at 30 September
2012 3,348 19,307 1,362 4,642 122,199 3,349 154,207
Year to 31 March 2013
As at 1 April 2012 3,348 19,307 1,362 4,642 113,343 4,146 146,148
Fair value movement
of investments - - - - 32,574 - 32,574
Costs allocated to
capital - - - - (1,179) - (1,179)
Net revenue for the
year - - - - - 2,350 2,350
Movement in fair
value of derivative
financial
instruments - - - - (479) - (479)
Dividends paid in
the year - - - - - (2,263) (2,263)
As at 31 March 2013 3,348 19,307 1,362 4,642 144,259 4,233 177,151
Balance Sheet (unaudited)
as at 30 September 2013
As at As at As at
30 September 30 September 31 March
2013 2012 2013
£'000 £'000 £'000
Fixed assets
Investments designated at fair value
through profit and loss 184,137 164,603 179,446
Current assets
Debtors 1,132 553 711
Cash at bank 12,523 5,241 12,961
13,655 5,794 13,672
Creditors: amounts falling due within
one year
Other creditors (474) (692) (413)
Revolving credit facility (15,000) (15,000) (15,000)
(15,474) (15,692) (15,413)
Net current liabilities (1,819) (9,898) (1,741)
Total assets less current liabilities 182,318 154,705 177,705
Creditors: amounts falling due after
more than one year
Interest rate swap (278) (498) (554)
Net assets 182,040 154,207 177,151
Share capital and reserves
Called-up share capital 3,348 3,348 3,348
Share premium account 19,307 19,307 19,307
Capital redemption reserve 1,362 1,362 1,362
Special reserve 4,642 4,642 4,642
Capital reserve 149,499 122,199 144,259
Distributable revenue reserve 3,882 3,349 4,233
Total equity shareholders' funds 182,040 154,207 177,151
Net asset value per Ordinary share 543.79p 460.65p 529.19p
Summarised Statement of Cash Flows (unaudited)
as at 30 September 2013
Note As at As at As at
30 September 30 September 31 March
2013 2012 2013
£'000 £'000 £'000
Net cash inflow from operating
activities 3 1,813 456 874
Servicing of finance
- Interest and similar charges
paid (322) (323) (646)
Net cash outflow from servicing
of finance (322) (323) (646)
Capital expenditure and
financial investment
- Purchases of investments (66,135) (18,255) (28,187)
- Sales of investments 66,469 11,660 29,217
Net cash inflow/(outflow) from
capital expenditure and
financial investment 334 (6,595) 1,030
Equity dividends paid (2,263) (2,263) (2,263)
Decrease in cash 4 (438) (8,725) (1,005)
Notes to the Financial Statements
as at 30 September 2013
1 Financial information
The financial information contained in this report does not constitute full
statutory accounts as defined in section 434 of the Companies Act 2006. The
financial information for the six months to 30 September 2013 and 30 September
2012 has not been audited or reviewed by the Company's Auditor pursuant to the
Auditing Practices Board guidance on such reviews.
The information for the year ended 31 March 2013 has been extracted from the
latest published audited financial statements, which have been filed with the
Registrar of Companies. The Report of the Auditors on those financial
statements was unqualified and did not contain a statement under section
498(2) or (3) of the Companies Act 2006.
The financial statements are prepared on the basis of the accounting policies
set out in note 1 on pages 30 and 31 of the Annual Report and Accounts for the
year ended 31 March 2013.
2 Tax credit/charge on ordinary activities
The tax charge for the half year is nil (six months to 30 September 2012: nil;
year to 31 March 2013: nil) based on an estimated effective tax rate of 0% for
the year ending 31 March 2014. The estimated effective tax rate is 0% as
investment gains are exempt from tax owing to the Company's status as an
investment trust and there is expected to be an excess of management expenses
over taxable income.
3 Reconciliation of net return before finance costs and taxation to net cash
inflow from operating activities
6 months to 6 months to Year to
30 September 30 September 31 March
2013 2012 2013
£'000 £'000 £'000
Net return before finance costs
and taxation 7,476 10,645 33,910
Gains on investments designated
at fair value through profit or
loss (5,604) (10,106) (32,574)
Movement in fair value of
derivative financial instruments (276) 423 479
Increase/(decrease) in creditors 59 (519) (796)
Decrease/(increase) in
prepayments and accrued income 158 13 (145)
Net cash inflow from operating
activities 1,813 456 874
4 Reconciliation of net cash flows to movements in net debt
6 months to 6 months to Year to
30 September 30 September 31 March
2013 2012 2013
£'000 £'000 £'000
Decrease in cash in the period (438) (8,725) (1,005)
Movement in net debt (438) (8,725) (1,005)
Net debt at beginning of period (2,039) (1,034) (1,034)
Net debt at end of period (2,477) (9,759) (2,039)
5 Analysis of net debt
As at As at
1 April 30 September
2013 Cash flows 2013
£'000 £'000 £'000
Cash at bank 12,961 (438) 12,523
Debt due in less than one year (15,000) - (15,000)
(2,039) (438) (2,477)
6 Going Concern
The Company has adequate financial resources to meet its investment commitments
and as a consequence, the Directors believe that the Company is well placed to
manage its business risks. After making appropriate enquiries and due
consideration of the Company's cash balances, the liquidity of the Company's
investment portfolio and the cost base of the Company, the Directors have a
reasonable expectation that the Company has adequate available financial
resources to continue in operational existence for the foreseeable future and
accordingly have concluded that it is appropriate to continue to adopt the
going concern basis in preparing the Half-yearly Report, consistent with
previous years.
Directors
Kathryn Matthews (Chairman)
Roger Cuming
Michael Moule
James Robinson (appointed 30 September 2013)
Principal Advisers
Manager Financial Adviser
Montanaro Asset Management Limited Cantor Fitzgerald Europe
53 Threadneedle Street 17 Crosswall
London EC2R 8AR London EC3N 2LB
Tel: 020 7448 8600
Fax: 020 7448 8601 Bankers
info@montanaro.co.uk
www.montanaro.co.uk HSBC International
PO Box 181
Company Secretary, Administrator 27-32 Poultry
and Registered Office London EC2P 2BX
Capita Sinclair Henderson Limited
Beaufort House ING Bank N.V.
51 New North Road London Branch
Exeter EX4 4EP 60 London Wall
Tel: 01392 412 122 London EC2M 5TQ
Fax: 01392 253 282
Auditor
Registrar
KPMG Audit Plc
Capita Registrars 100 Temple Street
Shareholder Services Department Bristol BS1 6AG
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Tel: 0871 664 0300
(calls cost 10p per minute plus network charges)
Fax: 020 639 2342
ssd@capitaregistrars.com
www.capitaregistrars.com
Montanaro UK Smaller Companies Investment Trust PLC
Registered in England and Wales No. 3004101
An investment company as defined under
Section 833 of the Companies Act 2006
Sources of further information
The Company's share price is listed in the Financial Times under "Investment
Companies".
Information on the Company is also available on the Manager's website:
www.montanaro.co.uk and the Company's website: www.montanarouksmaller.co.uk
Key Dates
March Company Year End
June Annual Results
July Annual General Meeting
November Interim Results
Frequency of NAV Publication
The Company's NAV is released to the London Stock Exchange on a daily basis.
ISA Status
The Company is fully eligible for inclusion in ISAs.
Association of Investment Companies ("AIC")
The Company is a member of the AIC.
National Storage Mechanism
A copy of the Annual Report 2013 has been submitted to the National Storage
Mechanism ("NSM") and is available for inspection at the NSM, which is situated
at: www.morningstar.co.uk/uk/NSM
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on this announcement (or any other website) is
incorporated into, or forms part of, this announcement.
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