Half Yearly Report

RNS Number : 1065K
Schroder UK Growth Fund PLC
23 December 2015
 

Half Year Report

 

Schroder UK Growth Fund plc (the "Company") hereby submits its Half Year Report for the period ended 31 October 2015 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.2. 

 

The Half Year Report is also being published in hard copy format and an electronic copy of that document will shortly be available to download from the Company's website www.schroderukgrowthfund.com. Please click on the following link to view the document:

 

http://www.rns-pdf.londonstockexchange.com/rns/1065K_-2015-12-23.pdf

 

 

The Company has submitted a pdf of the hard copy format of its Half Year Report to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

 

Enquiries:

 

Andrea Davidson

Schroder Investment Management Limited                                        Tel: 020 7658 4430

 

23 December 2015

 

 

 

Interim Management Report

 

Chairman's Statement

 

Performance

 

During the six month period to 31 October 2015, the Company's NAV produced a total return of -5.3%, marginally outperforming the Benchmark index which showed a total return of -5.7%. The share price produced a total return of -5.7%. Further comment on performance and investment policy may be found in the Manager's Review.

 

Earnings and dividends

 

The Directors have declared a first interim dividend of 2.60p per share for the year ending 30 April 2016 (2015: 2.50p). The first interim dividend will be payable on 29 January 2016 to shareholders on the Register on 8 January 2016.

 

Gearing policy

 

The Company has access to gearing through a combination of a revolving credit facility and an overdraft.

 

Throughout the period the credit facility remained undrawn and the net cash position remained at a similar level, reducing from 3.6% to 3.3%. The Manager will utilise the Company's borrowing facility when suitable opportunities are judged to exist at appropriate valuations. The Board has set pre-agreed limits so that net effective gearing does not represent more than 20% of shareholders' funds.

 

Discount management policy

 

The Board currently has a policy towards the average discount of the Company's share price to its ex income NAV which seeks to restrict this to no more than 5% over the long term. The recent testing market environment has posed a substantial challenge to this stated policy.

 

The discount to ex income NAV at 31 October 2015 was 9.2%, compared to 8.4% at the beginning of the period and the average discount during the period was 7.8%. The Directors keep the discount under close review and in support of the discount policy, a total of 387,000 shares were bought back by the Company during the period to be held in Treasury.

 

Management fee

 

I reported in my statement for the six months to 31 October 2014, that a fee holiday to cover the entire cost of the transition of the portfolio was agreed as one of the conditions of Schroders' re-appointment as Manager in October 2014. The fee holiday came to an end during December 2015 and a reduced management fee of 0.5% p.a. is now payable.

 

Board composition and succession planning

 

As part of the Board's long term succession planning, Andrew Hutton was appointed as Senior Independent Director and Chairman of the Nomination Committee in September 2015. Your Board has also reviewed its composition, balance and diversity and, in view of the length of service of a number of its members, it will be considering plans for refreshment in the coming year.

 

Outlook

 

The Company's latest half year was a challenging period and many of the uncertainties troubling investors remain to be resolved. Furthermore, our Manager continues to believe that overall UK share valuations are not especially attractive, notwithstanding the weakness in stock prices since the market high reached in the summer. Our current portfolio, however, has been constructed from among those companies judged to offer a compelling combination of value and quality and which have the potential to produce very satisfactory returns on capital. When the broader outlook is more appealing, shareholders can expect to see the emergence of a more aggressive stance, including the use of our gearing facility.

 

Alan Clifton

Chairman

 

23 December 2015

 

Manager's Review

 

Market Background

 

The past six months have been a difficult and volatile time for UK equities as a number of global uncertainties influenced global markets. The FTSE All-Share Index fell 5.7% (source: Thomson Reuters).

 

Markets were initially impacted by concerns surrounding negotiations between Greece and its international creditors, with a potential exit from the European Union seemingly possible, but these worries were supplanted by fears about emerging markets growth, and particularly the outlook for China. At the same time, comments about the prospect of an interest rate rise in the US in September further strained the fragile sentiment towards emerging markets, most acutely felt in falling commodity markets.

 

October provided a period of respite as weak US employment data tempered expectations that US rates would rise in 2015 (which did indeed happen after the end of the period under review). Elsewhere, monetary policy was more supportive as the Chinese authorities further reduced interest rates and the president of the European Central Bank hinted that further quantitative easing measures would be considered. The Bank of England kept policy rates unchanged and comments from the governor of the Bank of England suggested that the timing of the first UK interest rate rise would be deferred.

 

Within the stock market, the dominant factor was underperformance of commodity-related stocks such as miners and oil companies, whilst mid cap stocks outperformed large cap stocks.

 

Portfolio Performance

 

The NAV cum income return over the past six months was -5.3%, marginally outperforming the FTSE All-Share Index which was down -5.7% (source: Morningstar/Thomson Reuters).

 

At a stock level, cruise line operator Carnival was the Company's top contributor. Their second-quarter results served to underline a gradual recovery in depressed yields on the back of solid demand and industry capital discipline. The company has also been a beneficiary of the lower price of oil.

 

Accounting and payroll software provider Sage Group performed well in the run up to a robust set of full-year results. The market focused on the company's resilient cash-generative growth potential, and the new management team meeting its organic revenue growth and operating profit margin targets, underpinning an 8.1% increase in the final dividend.

 

Business information group RELX (previously Reed Elsevier) was another key position, with solid third-quarter results reiterating another year of underlying revenue, profit and earnings growth. The Company also benefited from not owning miners Anglo American and BHP Billiton.

 

On the negative side, not owning beverage company SABMiller (after it agreed to combine with AB InBev), and consumer goods group Reckitt Benckiser Group (as consumer goods shares did well) detracted from performance relative to the index. Additionally, weak energy prices were a drag on Drax Group, the power generation business.

 

Portfolio activity

 

We reduced our position in Ladbrokes following announcement of the proposed merger with Coral. Although the deal offers cost synergies, Ladbrokes' balance sheet deterioration leaves little downside protection pre and post-merger.

 

Following strong share price performances we reduced holdings in housebuilders Crest Nicholson and Taylor Wimpey, and exited positions in the London Stock Exchange Group and Regus. Similarly we reduced the holdings in QinetiQ Group, enterprise software group Sage Group, wealth manager St. James's Place and BT. These stocks have all performed well since their inclusion in the portfolio and the shares more fully reflect the outlook for the business.

 

Proceeds have been reinvested into shares which had not performed as strongly, including in the aerospace and defence sector, eg BAE Systems. We took advantage of volatility in oil and gas service names by adding Wood Group to the portfolio. The valuation appears to be discounting a significant downturn in profits, and given the strength of its balance sheet the company looks well positioned to withstand this.

 

We added to the holding in Daily Mail and General Trust following the full-year results and in the wake of share price weakness. Our view remains that the group's new flagship digital information service for the insurance industry, RMS (one), offers significant long-term potential. We also added to the holding in GlaxoSmithKline, where we continue to believe that the growth drivers for its HIV/Aids drugs, vaccines and consumer health business are being overlooked by the market.

 

We added to the positions in Partnership Assurance Group and Just Retirement Group. The companies operate in the enhanced annuity space, which has suffered following the pension reforms in the 2014 budget, and the market has welcomed their decision to unite and simultaneously raise new capital. There are tentative signs that the falls in the individual annuity market have bottomed and could begin to offer a renewed avenue for growth to complement the bulk purchase annuity market where they have recently focused their attention.

 

Policy

 

We have kept the Company's portfolio cautiously positioned, and currently are not utilising the gearing facility as we remain concerned that the valuation for the average stock in the market remains high.

 

Valuation dispersion within the market has started to move up and we have selectively rotated the portfolio to take advantage of value opportunities as they emerge. However, value remains concentrated into a narrow group of sectors and we are aware that many of these sectors are exposed to weakening commodity prices and dividends and balance sheets are at risk.

 

Recent levels of market volatility are reminiscent of periods of market fear such as the Eurozone crisis. Historically these have been proven to be good opportunities to increase risk within the portfolio, however, average valuations are not as supportive as there were on those previous occasions. Market levels remain high, driven by historically low bond yields which underpin the relative attractiveness of the asset class, whilst encouraging greater levels of mergers and acquisitions.

 

The prospects for the market's more domestically-focused companies remain reasonably positive, although this has not gone unrecognised by the market. Falling unemployment and signs of real wage growth coming through should support the British consumer. Interest rate rises, when they materialise, have been well telegraphed and are likely to be relatively small. However, the impact of a rising minimum wage is likely to act as a headwind to profit growth for many companies exposed to this favourable demand backdrop and increased volatility is anticipated as the vote on Britain's position within the EU approaches. Taking a more global viewpoint the market is struggling to make progress as liquidity is removed from the US economy. The impact of an appreciating currency and the prospect of rising US interest rates is not only tempering the outlook for US corporate profits but is also leading to knock-on effects in emerging markets and the commodity complex.

 

Our investment approach forces a constant re-evaluation of where the best combination of value and quality lies in the market. We are seeking to invest in companies which appear cheap in a cyclical context and which have the potential to produce decent returns on capital and ultimately cash returns to shareholders over the medium term. Defence and pharmaceutical companies and domestic banks appear to be good examples of this at the current time.

 

The market has placed certain companies, whose earning streams appear relatively resilient or are able to deliver strong organic growth, on high share valuations. We have reduced exposure to such companies as St James's Place, London Stock Exchange and BT. Whilst the value opportunity within the market has reduced, we continue to find new areas to invest but notice that there are a greater number of stocks that incorporate a self-help component to their investment case. As such, the domestic banks, Balfour Beatty, Tesco and FirstGroup all represent holdings where the primary investment case is more predicated on the successful implementation of an internal self-help programme, rather than depending on a continuation of the benign economic backdrop. The portfolio retains an overweight exposure to the media, software and tobacco sectors where we continue to believe the current valuations do not reflect the high returns and their strong cash generation.

 

Schroder Investment Management Limited

23 December 2015

 

Securities shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell.

 

Principal risks and uncertainties

 

The principal risks and uncertainties with the Company's business fall into the following categories: strategy and competitiveness risk; investment management risk; financial risks; accounting, legal and regulatory risk; custodian and depositary risk; and service provider risk. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 16 to 18 of the Company's published Annual Report and Accounts for the year ended 30 April 2015. These risks and uncertainties have not materially changed during the six months ended 31 October 2015.

 

Going concern

 

Having assessed the principal risks and uncertainties, and the other matters discussed in connection with the viability statement as set out on pages 18 and 19 of the published Annual Report and Accounts for the year ended 30 April 2015, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

 

Related party transactions

 

Details of transactions with related parties, which under the Financial Conduct Authority's Listing Rules include the Manager, can be found on page 48 of the Company's published Annual Report and Accounts for the year ended 30 April 2015. There have been no material transactions with the Company's related parties during the six months ended 31 October 2015.

 

Directors' responsibility statement

 

The Directors confirm that, to the best of their knowledge, this set of condensed financial statements has been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP) and with the Statement of Recommended Practice, "Financial Statements of Investment Companies and Venture Capital Trusts" issued in November 2014 and that this Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the FCA's Disclosure and Transparency Rules

 

Income Statement

 

(Unaudited)

Six months ended

31 October 2015

(Unaudited)

Six months ended

31 October 2014

(Audited)

Year ended

30 April 2015





Losses on investments held at fair value through profit or loss

Income from investments

Other interest receivable

and similar income

Gross return/(loss)

Investment management fee

 

Administrative expenses

 

Net return/(loss) before

finance costs and taxation

Finance costs

Net return/(loss) on ordinary

activities before taxation

Taxation on ordinary activities

Net return/(loss) on ordinary

activities after taxation

Return/(loss) per share

 

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 recognised gains and losses other than those disclosed in the Income Statement and Statement of Changes in Equity.

 

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

 

Statement of Changes in Equity

 

For the six months ended 31 October 2015 (Unaudited)





At 30 April 2015

Repurchase of ordinary shares into Treasury

Net (loss)/return on

ordinary activities

Dividends paid in the period

At 31 October 2015

 

 

For the six months ended 31 October 2014 (Unaudited)





At 30 April 2014

Net (loss)/return on ordinary activities

Dividends paid in the period

At 31 October 2014

 

 

For the year ended 30 April 2015 (Audited)





At 30 April 2014

Net (loss)/return on

ordinary activities

Dividends paid in the

period

At 30 April 2015

 

Statement of Financial Position

 




Fixed assets


Investments held at fair value through profit or loss

Current assets

Debtors

Cash at bank and in hand


Current liabilities

Creditors: amounts falling due within one year

Net current assets

Net assets

Capital and reserves

Called-up share capital

Share premium

Capital redemption reserve

Share purchase reserve

Warrant exercise reserve

Capital reserves

Revenue reserve

Total equity shareholders' funds

Net asset value per share

 

Notes to the Accounts

 

1. Financial statements

 

The information contained within the accounts in this half year report has not been audited or reviewed by the Company's auditors.

 

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

 

2. Accounting policies

 

Basis of accounting

 

The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice and with the Statement of Recommend Practice ("SORP") "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued in November 2014 and which superseded the SORP issued in January 2009.

 

All of the Company's operations are of a continuing nature.

 

The Company has adopted Financial Reporting Standard ("FRS") 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", FRS 104 "Interim Financial Reporting" and the amended SORP, all of which became effective for periods beginning on or after 1 January 2015. Some presentational changes are required, following the adoption of these new standards, however there has been no change to the way the Company measures the numbers in the accounts.

 

The changes to these accounts required by FRS 102, FRS 104 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 related note, as it is no longer required for an investment company which meets certain specified conditions; and

 

-       new notes have been included entitled "Called-up share capital" and "Financial instruments measured at fair value".

 

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

 

3. Taxation on ordinary activities

 

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. Taxation on ordinary activities comprises overseas tax deducted at source, net of any rebates.

 

4. (Loss)/return per share

 




Revenue return

Capital loss

Total (loss)/return

Weighted average number of shares in issue

during the period

Revenue return per share

Capital loss per share

Total (loss)/return per share

 

5. Dividends paid

 




Second interim dividend of 2.50p (2014: 2.25p)

Special dividend of 1.00p (2014: 1.00p)

First interim dividend of 2.50p

Total dividends paid in the period

 

A first interim dividend of 2.60p (2014: 2.50p) per share, amounting to £4,174,000 (2014: £4,023,000) has been declared payable in respect of the year ending 30 April 2016.

 

6. Called-up share capital

 

Changes in issued shares are as follows:

 




Opening balance of 160,917,184 (31 October 2014 and 30 April 2015: same) shares of 25p each

Repurchase of 387,000 (six months ended 31 October 2014 and year ended 30 April 2015: nil) shares into Treasury

Subtotal of 160,530,184 (31 October 2014 and 30 April 2015: 160,917,184) shares

387,000 (31 October 2014 and 30 April 2015: nil) shares held in Treasury

Closing balance of 160,917,184 (31 October 2014 and 30 April 2015: same) shares of 25p each, including shares held in Treasury.

 

7. Net asset value per share

 

Net asset value per share is calculated by dividing shareholders' funds by the number of shares in issue, excluding shares held in Treasury, at 31 October 2015 of 160,530,184 (31 October 2014 and 30 April 2015: 160,917,184).

 

8. Financial instruments measured at fair value

 

The Company's financial instruments that are held at fair value comprise its investment portfolio. At 31 October 2015, all investments in the Company's portfolio were categorised as level (a) in accordance with paragraph 11.27 of FRS 102. That is, they are valued using quoted bid prices in active markets (31 October 2014 and 30 April 2015: same).

 

 


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