Annual Financial Report

SVM UK EMERGING FUND PLC ANNUAL FINANCIAL RESULTS FOR THE YEAR ENDED 31 MARCH 2011 INVESTMENT OBJECTIVE The objective of the Fund is to achieve long term capital growth from investments in smaller UK companies with a particular focus on the those listed on the Alternative Investment Market ("AIM"). HIGHLIGHTS * Net asset value increased by 27.5% compared to a rise of 29.1% in the FTSE AIM Index * Strong medium and long term outperformance. * Defensive position combining a number of special situations with a high cash weighting. * The Fund retains a concentrated portfolio targeted on absolute performance CHAIRMAN'S STATEMENT I am again pleased to be able to report a positive year for the Fund's asset value and share price. Over the year to 31 March 2011, the net asset value increased by 27.5% to 87.36 pence compared to rises of 29.1% and 5.4% in the benchmark, FTSE AIM Index and FTSE All-Share Index respectively. The Fund's share price rose 26.0% to 63 pence as at the end of March with the discount remaining virtually unchanged at 28%. Since the year end, the Fund has demonstrated its defensive characteristics, down just 1% against a benchmark fall of 5%. The Fund also continues to generate impressive longer term performance. The asset value and share price returned 172% and 147% respectively against a modest 5% rise in the benchmark since the remit change in September 2004. Incidentally, the FTSE All Share Index is up just 69% over this period, less than half that generated by the Fund. It is interesting that, while smaller companies have materially underperformed larger companies over the intervening six and a half years, stock picking within smaller companies has been an extremely profitable venture. We believe that this amply demonstrates the validity of the investment remit and the ability of the Managers to deliver this. Review of the year While the year under review showed positive stockmarket returns, the environment remained challenging for investors. Markets gyrated wildly as investors had to cope with `risk on, risk off' sentiment and volatility rose and fell accordingly. Happily for equity investors, other asset classes - bonds, property and cash - appear relatively unattractive and equities have benefitted accordingly. Recessionary pressures have eased globally and growth resumed although this has been anaemic in many of the more mature markets. Emerging markets have exhibited higher growth rates and have attracted substantial fund flows. The difference between developed and emerging markets remains stark with emerging markets retaining superior risk reward characteristics. Smaller companies outperformed their larger counterparts for the second year in a row, partially recovering from the savage underperformance during the 2008 financial crisis. The principal driver of stockmarket performance over the year was the surge in demand for commodities and, with limited supply, a corresponding strong rise in prices. Global demand continues apace, especially from China, which should ensure prices remain firm. The AIM Index has a material overweighting in companies specialising in resources which has led to its material outperformance of the All-Share Index. Portfolio There are approximately forty companies in the portfolio with 87% invested in AIM listed companies. The balance is spread between selective unquoted investments and a small number of residual positions quoted on the junior PLUS market. In terms of sectors, the Fund continues to retain an overweight exposure to resources, industrials and consumer services with little in financials, property or utilities. The year under review proved to be more active than in recent years. Three holdings were fully sold while a further two were reduced. It is interesting to note that merger & acquisition activity increased in the year and two portfolio holdings attracted cash bids. This allowed for the introduction of seven new holdings, all acquired through the Manager's preferred investment route - secondary fundraising by existing listed companies. The new investments are covered in greater detail in the Managers' Review. The Fund retains a concentrated portfolio, many of which are special situations, and has a healthy cash position. The Managers believe that this approach gives the potential of both relative outperformance and absolute gains. While individual investment risk is higher, this is mitigated through a diversified portfolio. The trade off remains between holding a broadly diversified portfolio which will demonstrate benchmark type returns against holding relatively few large positions with the potential of strong performance. The Managers continue to favour the latter approach which again proved helpful in the year. Outlook Undoubtedly, the world is in a much better position than it was a couple of years ago but it would be foolish to believe that all the problems have been resolved. Only when quantative easing in its many guises has been removed and interest rates normalised will we know the true health of the world and in particular the highly indebted countries. Investors and commentators alike appear sanguine about this which is surprising. The Managers remain cautious however and continue to adopt a defensive stance. The Fund retains a concentrated portfolio of special situations and higher growth companies, many of which are modestly valued in comparison to their larger equivalents. Selective corporate activity should continue as cash rich corporates are attracted to the smaller higher growth competitors. This should prove beneficial to the Fund. The Fund's aim remains to deliver long term capital growth, lower volatility and superior absolute and relative returns. The Board and the Managers believe that it is well placed to continue to deliver on these aims. Peter Dicks Chairman 20 June 2011 INCOME STATEMENT Year to 31 March 2011 Year to 31 March 2010 Revenue Capital Total Revenue Capital Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Net gains / (losses) on - 1,174 1,174 - 1,474 1,474 investments Income 26 - 26 23 - 23 Investment management fees - - - - - - VAT recovered on - - - - - - management fees Other expenses (66) (1) (67) (63) (2) (65) -------- ------- -------- -------- ------- -------- Return before interest and (40) 1,173 1,133 (40) 1,472 1,432 taxation Finance costs (2) - (2) (3) - (3) -------- -------- -------- -------- -------- -------- Transfer from reserves (42) 1,173 1,131 (43) 1,472 1,429 -------- -------- -------- -------- -------- -------- Return per ordinary share (0.70p) 19.53p 18.83p (0.72p) 24.52p 23.80p The total column of this statement is the profit and loss account of the Fund. All revenue and capital items in this statement derive from continuing operations. A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Fund have been reflected in the above statement. BALANCE SHEET As at As at 31 March 31 March 2011 2010 Â£'000 Â£'000 Investments at fair value through profit 4,973 3,848 or loss --------- --------- Current assets 859 883 Creditors: amounts falling due within one (586) (616) year --------- --------- Net current assets 273 267 --------- --------- Total assets less current liabilities 5,246 4,115 --------- --------- Equity shareholders' funds 5,246 4,115 --------- --------- Net asset value per ordinary share 87.36p 68.53p CASH FLOW STATEMENT Year to Year to 31 March 31 March 2011 2010 Â£'000 Â£'000 Net cash outflow from operating activities (38) (40) Returns on investment and servicing finance (2) (3) Capital expenditure and financial investments 21 191 Taxation paid - - --------- --------- Movement in cash (19) 148 --------- --------- RECONCILIATION OF MOVEMENT IN SHAREHOLDERS FUNDS For the year to 31 March 2011 Share Share Special Capital Capital Revenue capital premium reserve redemption reserve reserve reserve Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 As at 1 April 2010 300 314 5,144 27 (1,174) (496) Return / (loss) attributable - - - - 1,173 (42) to shareholders ------- ------- ------- ------- ------- ------- As at 31 March 2011 300 314 5,144 27 (1) (538) ------- ------- ------- ------- ------- ------- For the year to 31 March 2010 Share Share Special Capital Capital Revenue capital premium reserve redemption reserve reserve reserve Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 As at 1 April 2009 300 314 5,144 27 (2,646) (453) Return / (loss) attributable - - - - 1,472 (43) to shareholders ------- ------- ------- ------- ------- ------- As at 31 March 2010 300 314 5,144 27 (1,174) (496) ------- ------- ------- ------- ------- ------- DIRECTORS' RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS The Directors are responsible for preparing the financial statements in accordance with applicable law and regulations. Company law requires the Board to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (UK Standards and applicable law). The financial statements are required by law to give a true and fair view of the state of affairs of the Fund at the end of the financial year and of the net return of the Fund for that year. In preparing these financial statements, the Directors are required to: (a) select suitable accounting policies and then apply them consistently; (b) make judgments and estimates that are reasonable and prudent; and (c) state whether applicable accounting standards have been followed. The Board is also responsible for the maintenance of proper accounting records which disclose with reasonable accuracy, at any time, the financial position of the Fund and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Fund and for taking reasonable steps for the prevention and detection of fraud and other irregularities. To the best of the knowledge of the Board, the financial statements give a true and fair view of assets, liabilities, financial position and profit/loss and the Report of the Directors includes a fair review of the development and performance of the Fund and a description of the principal risks that it faces. PRINCIPAL RISKS & UNCERTAINTIES The Board believes that the Fund has a relatively low risk profile in the context of the investment trust industry. This belief arises from the fact that the Fund has a simple capital structure; invests primarily in UK quoted companies; has limited exposure to derivatives; and outsources all the main operational activities to recognised, well established firms. The principal risks inherent within the Fund are market related and have been classified as valuation risk, liquidity risk, interest rate risk and credit risk. Additional risks faced by the Fund can be categorised under the following headings; investment policy and strategy, share price discount, regulatory and operational / financial risk. The Fund has an established environment for the management of these risks which are continually monitored by the Managers. The Board regularly considers the risks associated with the Fund and receives both formal and informal reports from the Managers and third party service providers addressing these risks. Explanations of these risks and how they are mitigated are detailed in the Annual Report, which will be available on the Manager's website shortly. NOTES 1. The accounts have been prepared in accordance with applicable accounting standards and the 2009 Statement of Recommended Practice (SORP) issued by the Association of Investment Companies. 2. Returns per share are based on a weighted average of 6,005,000 (2010 - 6,005,000) ordinary shares in issue during the year. Total return per share is based on the total return for the year of Â£1,131,000 (2010 - Â£1,429,000). Capital return per share is based on net capital return for the year of Â£ 1,173,000 (2010 - Â£1,472,000). Revenue return per share is based on the revenue loss after taxation for the year of Â£42,000 (2010 - Â£43,000). The number of shares in issue at 31 March 2011 was 6,005,000 (2010 - 6,005,000) 3. Due to the size of the Fund, the Investment Managers have waived their fees for the year to 31 March 2010 and 2011. 4. The above unaudited figures do not constitute full accounts in terms of Section 435 of the Companies Act 2006 and are based on the report and accounts for the year to 31 March 2011. The accounts for the year to 31 March 2010, on which the auditors issued an unqualified report have been lodged with the Registrar of Companies and did not contain a statement required under Section 498 of the Companies Act 2006. 5. The annual report and accounts will be available on the Managers website www.svmonline.co.uk from the middle of June 2011. These accounts can be mailed to shareholders on request to the Managers and will be lodged with the Registrar of Companies. Copies are also available for inspection at 7 Castle Street, Edinburgh EH2 3AH, the registered office of the Fund. For further information, please contact: Donald Robertson SVM Asset Management 0131 226 6699 Roland Cross Broadgate Mainland 020 7726 6111

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