Annual Financial Report

SVM UK EMERGING FUND PLC ANNUAL FINANCIAL RESULTS FOR THE YEAR ENDED 31 MARCH 2012 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 decreased by 18.2% compared to a fall of 11.1% in the FTSE AIM Index * Strong medium and long term outperformance. * Defensive position combining a number of special situations, no gearing with a modest cash position. * The Fund retains a concentrated portfolio targeted on absolute performance CHAIRMAN'S STATEMENT It is disappointing to have to report a down year both on a relative and absolute basis. Over the year to 31 March 2012, the net asset value decreased by 18.2% to 71.47 pence compared to falls of 11.1% and 2.1% in the benchmark, FTSE AIM Index and FTSE All Share Index respectively. The Fund's share price fell 12.7% to 55 pence as at the end of March with the discount narrowing from 27.9% down to 23%. Since the year end, the Fund has demonstrated its defensive characteristics and resumed its relative outperformance. Notwithstanding this year's disappointing performance, it retains an impressive longer term track record. The net asset value and share price has returned 122% and 116% respectively against a decline of 7% in the benchmark since the remit change in September 2004. The FTSE All Share Index is up just 32% over this period, approximately a quarter of that generated by the Fund. It is interesting that, while smaller companies have materially underperformed larger companies over the intervening period, stock picking within smaller companies has proved to be extremely profitable. 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 The year can be divided comfortably in two - a negative first half followed by a recovery in the second. In the first half, investors avoided investments that were seen as being risky, preferring the perceived safety of higher yielding large companies and government bonds. Globally, this has led to emerging markets relatively underperforming and suffering greater falls than mature markets. Domestically, smaller companies underperformed larger ones. The falls registered in the September quarter rivalled those experienced in the height of the financial crisis in 2008, predominantly caused by the ongoing problems in Europe. The second half of the year saw a rebound although not sufficient to erase earlier losses. The recovery was led by larger companies and small companies continued to lag. This appears perverse given the superior growth prospects and debt dynamics within both smaller companies and emerging markets. In terms of performance drivers, those sectors that outperformed in the previous year underperformed in this. Principally, resource companies, a large component of the FTSE AIM Index, showed weakness on lower underlying commodity prices. This is likely to be short lived as the supply demand imbalance still remains with China, notwithstanding its cooling economy, continuing to consume at a high rate. Portfolio There are in excess of 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 still retains its focus on basic materials (principally precious metals), oil & gas (mainly exploration) and in consumer services & healthcare. It has little exposure to some of the more challenged sectors such as banks and retailers. Following on from the previous year, the year under review proved to be more active than historically. The opportunity was taken partially to realise three holdings with the residual positions being retained as further value is expected. This allowed for the introduction of four new holdings, the majority of which were 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. In addition, further allocations were made to six existing investments at attractive levels. The Fund retains a concentrated portfolio, many of which are special situations, and a modest cash position. The Managers believe that this approach gives the potential of both relative out-performance 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 has served the Fund admirably over the longer term. Outlook While the worst of the global financial and ensuing economic crisis appears to be behind us, it would be foolish to believe that it is plain sailing from here on. The root causes of the crisis are still to be addressed and quantitative easing, helpful though it is in providing liquidity, simply delays the inevitable. Only when the various stimuli are removed and interest rates normalised will we know the true health of the world and in particular the highly indebted countries. 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. Its 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 18 June 2012 INCOME STATEMENT Year to 31 March 2012 Year to 31 March 2011 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Net (losses) / gains on - (922) (922) - 1,174 1,174 investments Income 39 - 39 26 - 26 Investment management fees - - - - - - Other expenses (67) (1) (68) (66) (1) (67) -------- ------- -------- -------- ------- -------- Return before interest and (28) (923) (951) (40) 1,173 1,133 taxation Finance costs (3) - (3) (2) - (2) -------- -------- -------- -------- -------- -------- Transfer from reserves (31) (923) (954) (42) 1,173 1,131 -------- -------- -------- -------- -------- -------- Return per ordinary share (0.52p) (15.37p) (15.89p) (0.70p) 19.53p 18.83p 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 2012 2011 £'000 £'000 Investments at fair value through profit or loss 4,064 4,973 --------- --------- Current assets 861 859 Creditors: amounts falling due within one year (633) (586) --------- --------- Net current assets 228 273 --------- --------- Total assets less current liabilities 4,292 5,246 --------- --------- Equity shareholders' funds 4,292 5,246 --------- --------- Net asset value per ordinary share 71.47p 87.36p CASH FLOW STATEMENT Year to Year to 31 March 31 March 2012 2011 £'000 £'000 Net cash outflow from operating activities (27) (38) Loss on investment and servicing finance (3) (2) Capital expenditure and financial investmentr 30 21 Taxation paid (4) - --------- --------- Movement in cash (4) (19) --------- --------- RECONCILIATION OF MOVEMENT IN SHAREHOLDERS FUNDS For the year to 31 March 2012 Share Share Special Capital Capital Revenue capital premium reserve redemption reserve reserve reserve £'000 £'000 £'000 £'000 £'000 £'000 As at 1 April 2011 300 314 5,144 27 (1) (538) Loss attributable to - - - - (923) (31) shareholders ------- ------- ------- ------- ------- ------- As at 31 March 2012 300 314 5,144 27 (924) (569) ------- ------- ------- ------- ------- ------- For the year to 31 March 2011 Share Share Special Capital Capital Revenue capital premium reserve redemption reserve reserve reserve £'000 £'000 £'000 £'000 £'000 £'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) ------- ------- ------- ------- ------- ------- 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 shortly be available on the Manager's website. 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 (2011 - 6,005,000) ordinary shares in issue during the year. Total return per share is based on the total loss for the year of £954,000 (2011 - return of £1,131,000). Capital return per share is based on net capital loss for the year of £923,000 (2011 - return of £1,173,000). Revenue return per share is based on the revenue loss after taxation for the year of £31,000 (2011 - £42,000). The number of shares in issue at 31 March 2012 was 6,005,000 (2011 - 6,005,000) 3. Due to the size of the Fund, the Investment Managers have waived their fees for the year to 31 March 2011 and 2012. 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 2012. The accounts for the year to 31 March 2011, 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 2012. 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 0207 726 6111

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