Annual Financial Report
ABERFORTH SMALLER COMPANIES TRUST plc
Audited Final Results for the year to 31 December 2011
The following is an extract from the Company's Annual Report and Accounts for
the year to 31 December 2011. The Annual Report is expected to be posted to
shareholders on 30 January 2012. Members of the public may obtain copies from
Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its
website at www.aberforth.co.uk. A copy will also shortly be available for
inspection at the authority's document viewing facility at 25 The North
Colonnade, Canary Wharf, London, E14 5HS.
FEATURES
Net Asset Value Total Return -13.5%
Benchmark Index Total Return -9.1%
Ordinary Share Price Total Return -18.5%
Second Interim Dividend increased by 10% to 14.3p per Share
The objective of Aberforth Smaller Companies Trust plc (ASCoT) is to achieve a
net asset value total return (with dividends reinvested) greater than on the
RBS Hoare Govett Smaller Companies Index (excluding Investment Companies) over
the long term. ASCoT is managed by Aberforth Partners LLP.
CHAIRMAN'S STATEMENT TO SHAREHOLDERS
Review of 2011 Performance
After a good start, the second half of 2011 once again saw acute stress in
financial markets. Although not as extreme as the fourth quarter of 2008,
credit markets, particularly European inter bank markets, displayed a level of
dysfunctionality that required, and invited, Central Bank intervention. In such
a hostile environment, there was a global flight to safety. Since 30 June 2011,
ten year UK government bond yields have fallen from 3.38% to 1.98% mirroring
similar moves in Germany and in the USA as risk assets plummeted.
In the UK equity market, all indices fell sharply in July and August, but
larger companies staged a partial recovery by the year end, so that over the
second half of the year, the FTSE 100 fell a modest 6.3% in capital only terms.
Mid and smaller companies suffered more severely and failed to enjoy the same
recovery, with the FTSE 250 declining by 15.9%, the RBS HGSC (XIC) by 15.3%,
the FTSE SmallCap by 18.6% and the minnows, as represented by the FTSE
Fledgling, by 25.6%. The UK was not alone. Of the world's 30 largest equity
markets, smaller companies achieved a positive return in just one country, and
underperformed their larger counterparts in all but three.
Against such a backdrop, it is frustrating to report that your Company,
Aberforth Smaller Companies Trust plc ("ASCoT"), lost all of its relative
outperformance of the first half during the brutal sell off of the past six
months. For the year to 31 December 2011, your Company's Net Asset Value total
return was -13.5% compared with -9.1% total return in the RBS HGSC (XIC), your
Company's benchmark. The Managers' Report provides greater insight into the
investment themes and influences over the year, where once again wider market
style effects have provided significant headwinds to performance.
Dividends
In sharp contrast to the Net Asset Value decline, your Company's income account
enjoyed an excellent year. Indeed the recovery in dividends from the investee
companies has resulted in your Company's earnings increasing at their fastest
rate since 1995. As I wrote in my Interim Statement in July 2011, "dividends
matter to all long term investors, but for value investors they have a special
importance". Your Board is pleased to declare a second interim dividend, in
lieu of a final dividend, of 14.3p. This results in total dividends for the
year of 20.75p representing an increase of 9.2% on 2010. This compares
favourably with both the ten and twenty year growth rates that have, in the
view of your Board and the Managers, been fundamental in establishing your
Company's long term record. At the year end share price of 501p, your Company's
shares deliver a 4.1% yield. Your Board is well aware of the significance of
the income component of the total returns from UK equities over the long term.
Your Board remains committed to your Company's progressive dividend policy. The
level of your Company's revenue reserves, after adjusting for payment of the
second interim dividend, amounting to 28.1p per share (up from 24.6p as at
31 December 2010), provides a degree of flexibility going forward in the event of
the UK economy dipping back into recession.
The second interim dividend will be paid on 24 February 2012 to Shareholders on
the register as at the close of business on 3 February 2012. The last date for
submissions of Forms of Election for those Shareholders wishing to participate
in your Company's Dividend Reinvestment Plan ("DRIP") is also 3 February 2012.
Details of the DRIP are available from Aberforth Partners LLP on request or on
its website, www.aberforth.co.uk.
Gearing
As I reported in my Interim Statement, your Company, in May 2011, negotiated a
new three year facility of £100m, replacing the previous facility. Your Board
regularly reviews the level of gearing with the Managers and is comfortable
that your Company has access to sufficient liquidity for both investment
purposes and also to fund share buy-ins as and when appropriate. As at 31
December 2011, £68m of this facility was utilised. The current level of gearing
is based upon attractive valuation levels, described in greater detail in the
Managers' Report, but should also be viewed in conjunction with exceptionally
strong balance sheets of the underlying investee companies held in your
portfolio.
Share Buy-In Authority and Treasury Shares
At the Annual General Meeting in March 2011, the authority to buy-in up to
14.99% of your Company's Ordinary Shares was approved. During the year, 228,000
Ordinary Shares were bought-in (0.2% of the Company's issued share capital) at
a total cost of £1.18 million. Consistent with your Board's stated policy,
those Ordinary Shares have been cancelled rather than held in treasury. Once
again, your Board will be seeking to renew the buy-in authority at the Annual
General Meeting on 7 March 2012. The Board keeps under constant review the
circumstances under which the authority is utilised in relation to the overall
objective of seeking to manage the discount.
Board Changes
Eddie Cran, who has been a Director since July 2001, will not be standing for
re-election at the forthcoming Annual General Meeting. Eddie has been a valued
member of your Board and we will all miss his insights and invaluable
contributions. We wish Eddie all the very best for the future.
We are delighted to appoint Richard Rae as a director of your Company with
effect from 26 January 2012. Richard's investment career extends over 25 years.
He has extensive knowledge of the UK smaller companies area, and we look
forward to working with him.
Summary
2011 proved frustrating for your Company. The "return to value" style shift,
which was witnessed through the latter part of 2010 and early 2011, faded as
dysfunctional European credit markets became the overriding issue for
investors.
2012 will undoubtedly bring challenges but amidst all the uncertainty it has
been encouraging to see the dividend recovery, described in recent reports by
both your Board and the Managers, come to fruition. While the trading backdrop
is likely to be tough in 2012, your Board and the Managers are cautiously
optimistic that the dividend recovery witnessed in 2011 has the strength to
continue through 2012. This optimism is supported by the strong balance sheets
of the investee companies and by the relative merits of equity capital, both of
which are described in more detail in the Managers' Report.
Value investing has proved extremely successful over the long run, but has
always been punctuated by sometimes extended periods when the style is out of
fashion. We are currently experiencing one of the longest such periods on
record. While it is impossible to know when it will end, your Managers remain
confident that your portfolio represents excellent value, and that this will
ultimately be recognised by the market.
Professor Paul R Marsh
Chairman
25 January 2012
MANAGERS' REPORT
Introduction
Performance in the first seven months of 2011 was good in both absolute and
relative terms. ASCoT's NAV total return up to the end of July was 6.1% against
4.1% for the RBS HGSC (XIC). However, coinciding with resurgent concerns about
the Eurozone and global economic growth, performance deteriorated through the
latter part of the year. From the end of July to the end of December, ASCoT's
NAV total return was -18.5%, which compares with
-12.7% for the benchmark. Hence, over 2011 as a whole, ASCoT's total return was
-13.5%, while the RBS HGSC (XIC)'s was -9.1%. Larger companies proved more
resilient over the year, with the FTSE All-Share's total return of -3.5% making
it one the best performing equity indices around the globe. The
under-performance of smaller companies came within the context of rising macro
economic concerns and risk aversion of the second half of the year.
Performance background
For the twelve months ended 31 December 2011 Basis points
Stock selection (353)
Sector selection 127
-----
Attributable to the portfolio of investments, based on (226)
mid prices (after transaction costs of 35 basis points)
Movement in mid to bid price spread (7)
Cash/gearing (125)
Purchase of ordinary shares 3
Management fee (73)
Other expenses (7)
-----
Total attribution based on bid prices (435)
Note: 100 basis points = 1%. Total Attribution is the difference between
the total return of the NAV and the Benchmark Index (i.e. NAV = -13.48%;
Benchmark Index = -9.13%; difference is -4.35% being -435 basis points).
The table above is an attribution analysis that sets out the impact of various
factors on ASCoT's relative performance in 2011. The largest effects - Stock
and Sector selection - are at the portfolio level. Underlying Stock and Sector
selection represent your Managers' individual investment decisions. In any
year, within a well diversified portfolio of 89 holdings, there will be good
investment decisions and poor investment decisions, the latter being instances
where your Managers have got the fundamentals of underlying businesses wrong.
However, potentially more influential on relative returns and on portfolio
level attribution, at least in the short term, is the wider market's
consideration of broader investment themes. This was the case in 2011, when
none of the themes that characterise the portfolio and that stem from your
Managers' consistently applied investment philosophy proved helpful.
Gearing
ASCoT's portfolio was, on average, geared by 10% through 2011. In an
environment of falling equity prices, this gearing exacerbated the decline in
ASCoT's NAV. Of ASCoT's 435 basis point under-performance against the benchmark
in 2011, the gearing effect accounted for 125 basis points. The reason for the
gearing is the abundance of attractively valued businesses within the RBS HGSC
(XIC). As described in greater detail later in this report, these valuations
would appear to discount the risk of a relapse into recession.
Style
Over the past 21 years, your Managers have consistently followed a value
investment style. Though unusual among small company investors, the logic for
this approach is underpinned by a number of studies that demonstrate
substantial long term out-performance of the value style: for example, the
London Business School's (LBS) work on the RBS HGSC (XIC) points to value
outstripping growth by five percentage points per annum since 1955. Within
Aberforth's 21 year history, a value philosophy has on the whole proved
rewarding, but there have been periods, most notoriously during the TMT bubble,
when a focus on low valuations has been made to look misguided. The last five
years have witnessed another period that has favoured the growth style, with
the LBS study showing growth stocks to have outstripped value stocks by ten
percentage points per annum over that period. This has represented a headwind
to ASCoT's performance. Your Managers were encouraged by signs of a resurgence
of the value style towards the end of 2010 and in the early months of 2011.
However, this came to a halt as the macro economic developments of the third
quarter weighed on sentiment and threatened the rising tide of general economic
growth. Thus, in the second half of the year the LBS study suggests that the
growth style returned to the fore. Nevertheless, your Managers continue to
favour a value approach that has been advantageous over the long term and that
at the current time is supported by the strong balance sheets and dividend
prospects detailed below.
Size
This theme is allied to style. The benchmark's definition - those companies in
the bottom 10% of the UK stockmarket's total capitalisation - means that FTSE
250 companies account for three quarters of its market capitalisation. However,
these mid cap companies represent just half of the portfolio by weight and,
accordingly, the portfolio has double the benchmark's weighting in its smaller
constituents. This positioning is motivated by the abundance of particularly
low valuations among the "smaller small" companies: at the year end, the RBS
HGSC (XIC)'s mid cap element was valued on a historic PE ratio 57% higher than
that of its small cap element. This substantial valuation gap has opened up
over the past eight years as investors have shortened their investment horizons
and run shy of the illiquidity of "smaller small" companies, notwithstanding
their fundamental attractions. Concurrently, shares in mid cap companies have
enjoyed incremental demand from diversification by large company UK equity
portfolios. Your Managers believe that the historically low PE ratings accorded
to "smaller small" companies in particular have the potential for upward
adjustment, with a consequent boost to ASCoT's capital value.
Strong balance sheets
Strong balance sheets are a feature of the corporate sectors of many major
economies. This is certainly the case in the UK and, more specifically, among
small UK quoted companies. At the year end, 43% of ASCoT's portfolio was
invested in companies with net cash on their balance sheets, somewhat higher
than the RBS HGSC (XIC)'s still respectable 31%. With the yield from cash
extremely low in the current interest rate environment, the stockmarket has
been disinclined to value the flexibility and defensiveness afforded by a
strong balance sheet, a trait that ASCoT has exploited. Curiously, however,
during the bear market of the second half of the year, the correlation between
balance sheet strength and share price performance within the benchmark was
remarkably low - the relationship between the two was effectively random. This
frustrating lack of discernment can probably be attributed to the prevailing
climate of extreme risk aversion, which has, so far, out-weighed other
considerations.
Dividend yield
The correlation between share price performance and dividend yield within the
RBS HGSC (XIC) through the second half was also surprising. Again, the
relationship was almost random: a superior dividend yield offered almost no
protection against share price falls. This was in sharp contrast to the
experience within the large company world, where high yielding sectors such as
Tobacco, Pharmaceuticals and Utilities all performed relatively well. The
discrepancy is, at least in part, a result of traditional prejudices about
small companies: it is not an area the market associates with yield and income.
But there is plenty of yield on offer. The 422 companies in the RBS HGSC (XIC)
had an aggregate historic yield of 3.2% at the year end, somewhat less than the
FTSE All-Share's 3.6%. However, one quarter of the benchmark's constituents did
not pay dividends, usually as a result of their early stage business models
that require cash generated to be reinvested in the businesses. The aggregate
yield of the 300 or so companies that do pay a dividend is 4.0%, actually
higher and less concentrated than large companies. As a function of your
Managers' value investment style, ASCoT's portfolio has almost always had a
higher yield than the RBS HGSC (XIC) and ended the year with a yield of 3.4%.
Valuations
Characteristics 31 December 2011 31 December 2010
ASCoT Benchmark ASCoT Benchmark
Number of companies 89 422 88 430
Weighted average market £391m £676m £424m £696m
capitalisation
Price earnings ratio 9.0x 10.5x 11.8x 13.7x
(historic)
Dividend yield (historic) 3.4% 3.2% 2.5% 2.4%
Dividend cover 3.3x 3.0x 3.4x 3.0x
The preceding table shows the historic PE and yield statistics for ASCoT's
portfolio and the RBS HGSC (XIC). Consistent with Aberforth's value investment
style, ASCoT is cheaper on both measures. However, the principal valuation
metric in your Managers' investment process is the ratio of enterprise value to
earnings before interest, tax and amortisation (EV/EBITA). This is because EV/
EBITA is balance sheet neutral. That is to say, with cash yielding so little at
the current time, the PE ratio of a company is affected by the liability
structure of its balance sheet: other things being equal, a company with a high
amount of net debt will have a lower PE ratio than a company with net cash. The
EV/EBITA is not distorted in this fashion.
2011 2012
Characteristics EBITA +5% EBITA -20%
ASCoT portfolio 6.9x 6.6x 8.6x
Tracked RBS HGSC (XIC) 8.7x 8.3x 10.9x
The preceding table sets out the EV/EBITA ratios for the portfolio and the
benchmark based on 2011 profits. It also gives two scenarios for 2012. The
first shows the EV/EBITA multiples that would prevail if profits grow by 5% in
2012. Given current macro economic headwinds, this might be considered an
ambitious outcome, but, for the portfolio at least, is not implausible owing to
the impact of acquisitions and recovery situations. The second scenario, which
assumes a 20% decline in profits, is essentially a re-run of the last
recession: in 2009, the aggregate EBITA of the year end portfolio fell by one
fifth on 2008. The resulting EV/EBITA ratio is 8.6x. But, would this represent
good value?
In 2010, with the recovery from recession well underway, the stockmarket had
re-rated the portfolio's 2009 trough EBITA to 12x. Thus, it might be argued
that, if profits do indeed fall by 20% again, present market prices are already
sufficiently low to allow an upwards revaluation of around one third, once
confidence builds that the current economic uncertainties have stopped getting
worse. In short, a lot of the potential bad news may already be in the current
price.
Potential catalysts
Value investors are usually capable of articulating the valuation merits of
their portfolios. The challenge to such claims typically focuses on what is
going to close the valuation gaps and make the portfolios less cheap. A
somewhat glib, but nonetheless relevant, response is "time". ASCoT has the
luxury of investment trust status and a portfolio of well funded businesses
that afford it a long term investment horizon: history suggests that over time
investors in relatively illiquid small and cheap equities are
disproportionately rewarded. However, there are other catalysts that can
precipitate revaluation in shorter time horizons.
Macro economy
An improvement in the global economy, together with a decline in risk aversion,
would encourage investment in smaller companies. Experience suggests that it
would also help the value style, since growth would be easier to come by and
the "scarcity premiums" currently enjoyed by secular growth stocks would be
harder to justify. Clearly, however, calling the direction of the macro economy
at the current time is more foolhardy than usual. The Eurozone crisis threatens
to precipitate another recession in the UK, and to be so reliant on politicians
to effect a solution is worrisome. More optimistically, the US economy has been
making better progress and relieves some of the pressure emanating from Europe.
Most importantly, the UK corporate sector, and within that ASCoT's investment
universe, remains relatively well positioned, having spent almost a decade in
financial surplus. Balance sheets are better positioned now than they were in
2008 to endure a deterioration in demand.
Corporate engagement
Since Aberforth's formation in 1990, your Managers have taken seriously their
governance responsibilities, voting at every general meeting of ASCoT's
investee companies and interacting with both the executives and non executives
of these companies. Occasionally, your Managers engage with boards more
actively, though discreetly, in order to improve the chances of closing value
gaps. Such active engagement can take several forms, but one feature of the
past year has been the change of chairmen of three investee companies. In each
case, your Managers were able to help in installing new chairmen with strong
records of shareholder value creation.
De-equitisation
De-equitisation is a term coined to describe the replacement of equity funding
with debt funding. It was all the rage in the years leading up to the global
financial crisis and undoubtedly boosted equity valuations. After a pause with
the rights issues of 2009, de-equitisation has returned, promoted by the
strength of corporate balance sheets. The most high profile form of
de-equitisation is takeover activity. Within the small UK quoted company
universe, the year under review started strongly in M&A terms: 12 deals, of
which ASCoT was a shareholder in three, had been completed by the half year.
However, through the third quarter, consistent with greater macro economic
uncertainty, takeover activity waned, so that over the year as a whole 18 deals
were completed, of which ASCoT had holdings in six. A renewed pick-up in M&A
would benefit the valuations of ASCoT's portfolio. In the meantime, other forms
of de-equitisation carry on, again promoted by strong balance sheets. Several
holdings continue with share buy-back programmes and there have been four
special dividends announced over the course of 2011.
Dividends
Payment of ordinary dividends is a form of de-equitisation that has been widely
over-looked for much of the past twenty years: with companies able to rely on
debt providers for their marginal funding requirements in the years prior to
the global financial crisis, income returns to providers of equity were often
neglected. However, it would seem that the substantial equity refinancings of
2009 have altered the relationship between companies and their shareholders,
with dividends acknowledged now as a higher priority. This secular change has
augmented the cyclical recovery in dividends to produce good rates of dividend
growth across the small company universe and in ASCoT's portfolio.
Band Nil IPOs Down Flat +0-10% +10-20% +>20% New
No of holdings 16 1 11 9 21 14 12 5
The preceding table classifies ASCoT's 89 holdings at the year end by their
most recent dividend action. The "Nil" category contains those companies that
do not pay dividends. Nine of those can be considered structural nil payers,
typically technology businesses at a relatively early stage of development. The
other seven are cyclical nil payers that will come back to the dividend
register once their profits recover and will at that point move into the "New"
category. At this stage in the cycle, this phenomenon has a substantial effect
on reported dividend growth across the portfolio and the RBS HGSC (XIC) as a
whole.
While the pace of dividend increases has to slow from the high rates of the
earlier stages of recovery, your Managers still expect the year end portfolio
to generate real dividend growth in 2012, from the historic yield of 3.4%.
Notwithstanding the clear macro economic challenges, this yield is supported by
both strong balance sheets and historically high dividend cover of 3.3x.
Despite these characteristics and the global yearning for yield, the well
diversified dividend income available in the small UK quoted company universe
is an under-appreciated opportunity.
Outlook
It is frustrating to be reporting on a year of poor absolute and relative
returns. This sense of frustration is compounded by ASCoT's good performance in
the first seven months of the year and by disappointing returns in the second
half's bear market from a portfolio that, by virtue of its above average yield
and strong underlying balance sheets, might reasonably have been thought
capable of performing better. The fact that such characteristics have so far
proved worthless highlights the extremity of negative sentiment in the current
market towards "smaller small" companies, particularly to those perceived by
the market incapable of growing through thick and thin. This majority of
companies within the RBS HGSC (XIC) includes numerous high quality businesses:
in today's market it is not necessary to compromise on quality to construct an
attractively valued portfolio. At the other extreme, lofty valuations are
accorded to the fortunate few businesses that are deemed capable of high rates
of secular growth. The present gulf between the valuations of value and growth
stocks is exaggerated. History suggests that the relationship between the two
groups will not stay at such stretched levels. The process of normalisation
will be advantageous to the value investment style. However, while this report
has described plausible catalysts, the timing is difficult to call.
In the meantime, the superior income characteristics of the portfolio that tend
to come hand-in-hand with your Managers' value style offer some compensation
pending a re-rating. As the Chairman has described, the admirable income
performance of the underlying investments over the last two years is now again
being reflected in ASCoT's own dividend payments: like the majority of its
investee companies, ASCoT yields more than gilts and has good prospects of
dividend growth.
Aberforth Partners LLP
Managers
25 January 2012
DIRECTORS' RESPONSIBILITY STATEMENT
Each of the Directors confirm to the best of their knowledge that:
(a) the financial statements, which have been prepared in accordance with
applicable accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company; and
(b) the Annual Report 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 it faces. A summary of these can be found
below.
On behalf of the Board
Prof Paul R Marsh
Chairman
25 January 2012
PRINCIPAL RISKS AND RISK MANAGEMENT
The Directors have established an ongoing process for identifying, evaluating
and managing the key risks faced by the Company. This process was in operation
during the year and continues in place up to the date of this report.
The Board believes that the Company has a relatively low risk profile in the
context of the investment trust industry. This belief arises from the fact that
the Company has a simple capital structure; invests only in small UK quoted
companies; has never been exposed to derivatives and does not presently intend
any such exposure; and outsources all the main operational activities to
recognised, well-established firms. Investment in small companies is generally
perceived to carry more risk than investment in large companies. While this is
reasonable when comparing individual companies, it is much less so when
comparing the volatility of returns from diversified portfolios of small and
large companies. The Board believes the Company's portfolio is diversified. In
addition, since returns from small and large companies are not perfectly
correlated, there is an opportunity for investors to reduce risk by holding
portfolios of both small and large companies together.
As the Company's investments consist of small UK quoted companies, the
principal risks facing the Company are market related and include interest
rate, liquidity, credit, and market price risk. An explanation of these risks
and how they are managed follows:
(i) Interest rate risk, being the risk that the interest receivable/payable and
the market value of investment holdings may fluctuate because of changes in
market interest rates.
When the Company decides to hold cash balances, all balances are held on
variable rate bank accounts yielding rates of interest linked to bank base rate
which at 31 December 2011 was 0.5% (2010: 0.5%). The Company's policy is to
hold cash in variable rate bank accounts and not usually to invest in fixed
rate securities. The Company's investment portfolio is not directly exposed to
interest rate risk.
The Company has a bank debt facility of £100,000,000 of which £68,000,000 was
drawn down as at 31 December 2011 (2010: debt facility of £75,000,000, of which
£51,750,000 was drawn down as at 31 December 2010).
(ii) Liquidity risk is the risk that the Company will encounter difficulty
raising funds to meet its cash commitments as they fall due. Liquidity risk may
result from either the inability to sell financial instruments quickly at their
fair values or from the inability to generate cash inflows as required.
The Company's assets comprise mainly readily realisable equity securities
which, if necessary, can be sold to meet any funding requirements though short
term funding flexibility can typically be achieved through the use of bank debt
facilities. The Company's current liabilities all have a remaining contractual
maturity of less than three months with the exception of the bank debt
facility.
(iii) Credit risk is the risk that a counterparty to a financial instrument
will fail to discharge an obligation or commitment that it has entered into
with the Company.
The Company invests in UK equities traded on the London Stock Exchange and
investment transactions are carried out with a large number of FSA regulated
brokers with trades typically undertaken on a delivery versus payment basis and
on a short settlement period.
Cash at bank is held with reputable banks with acceptable external credit
ratings.
The investment portfolio assets of the Company are held by The Northern Trust
Company, the Company's custodian, in a segregated account. In the event of the
bankruptcy or insolvency of Northern Trust the Company's rights with respect to
the securities held by the custodian may be delayed or limited. The Board
monitors the Company's risk by reviewing Northern Trust's internal control
report.
(iv) Market price risk, being the risk that the market value of investment
holdings will fluctuate as a result of changes in market prices caused by
factors other than interest rate or currency rate movement.
The Company's investment portfolio is exposed to market price fluctuations
which are monitored by the investment managers in pursuance of the investment
objective. No derivative or hedging instruments are currently utilised to
specifically manage market price risk. Further information on the investment
portfolio is set out in the Managers' Report. It is not the Managers' policy to
use derivatives to manage portfolio risk.
As at 31 December 2011, all of the Company's financial instruments were
included in the balance sheet at fair value. The fair value approximately
equates to the book value. The investment portfolio consisted of listed
investments valued at their bid price, which represents fair value. Any cash
balances, which are held in variable rate bank accounts, can be withdrawn on
demand with no penalty.
The Company's financial instruments are all denominated in sterling and
therefore the Company is not directly exposed to any significant currency risk.
However, it is recognised that most investee companies, whilst listed in the
UK, will be exposed to global economic conditions and currency fluctuations.
Additional risks faced by the Company, together with the approach taken by the
Board towards them, have been summarised as follows:
(i) Investment policy/performance - The performance of the investment portfolio
will typically not match the performance of the benchmark. However, the Board's
aim is to achieve the investment objective over the long term whilst managing
risk by ensuring the investment portfolio is managed appropriately. The
Managers have a clearly defined investment philosophy and manage a diversified
portfolio. The value of the portfolio will also be affected by events or
developments in the economic environment generally, for example inflation or
deflation, recession and movements in interest rates. The Board continually
monitors the Company's performance against the benchmark, and regularly receive
a detailed portfolio attribution analysis. The peer group is also regularly
monitored by the Board and this includes NAV and share price performance,
portfolio exposure, management fees and total expense ratios.
(ii) Share price discount - investment trust shares tend to trade at discounts
to their underlying net asset values. The Board and the Managers monitor the
discount on a daily basis. Furthermore, the Board intends to continue to use
the share buy back facility to seek to sustain as low a discount as seems
possible.
(iii) Gearing risk - in rising markets, the effect of borrowings would be
beneficial but in falling markets the gearing effect would adversely affect
returns to Shareholders. The Board consider the gearing level and associated
risk at each meeting.
(iv) Loss of key personnel - the quality of the investment management team is
considered crucial in delivering the investment objective and the loss of key
personnel at Aberforth Partners LLP could adversely affect performance. Board
members are in regular contact with the partners and staff of Aberforth
Partners LLP and monitor personnel changes.
(v) Regulatory risk - failure to comply with applicable legal and regulatory
requirements could lead to suspension of the Company's share price listing,
financial penalties or a qualified audit report. A breach of Section 1158 of
the Corporation Tax Act 2010 could lead to the Company being subject to capital
gains tax. The Board receives quarterly compliance reports from the Secretaries
to monitor compliance with rules and regulations, together with information on
future developments.
(vi) Operational/Financial risk - failure of the Managers' accounting systems
or those of other third party service providers could lead to an inability to
provide accurate reporting and monitoring, or potentially lead to the
misappropriation of assets. Agreements are in place with all key third party
service providers and the Board reviews regular reports on the internal
controls of the Managers and other key parties.
In summary, the Board regularly considers the risks associated with the
Company, the measures in place to monitor them and the possibility of any other
risks that may arise.
PORTFOLIO INFORMATION
Thirty Largest Investments
Valuation % of
No. Company £'000 Total Business Activity
1 RPC Group 28,276 4.7 Plastic packaging
2 e2v technologies 20,107 3.3 Electronic components & subsystems
3 Anite 19,067 3.2 Software - telecoms & travel
4 Galliford Try 18,049 3.0 Housebuilding & construction services
5 Micro Focus International 17,950 3.0 Software - development & testing
6 JD Sports Fashion 17,559 2.9 Retailing - sports goods & clothing
7 RPS Group 16,955 2.8 Energy & environmental consulting
8 Bodycote 16,530 2.7 Engineering - heat treatment
9 Mecom Group 15,724 2.6 European newspaper publisher
10 CSR 15,583 2.6 Location & connectivity chips for mobile devices
Top Ten Investments 185,800 30.8
11 Collins Stewart Hawkpoint 15,385 2.5 Stockbroker & private client fund manager
12 Spirit Pub Company 11,993 2.0 Managed pub operator
13 Phoenix IT Group 11,993 2.0 IT services & disaster recovery
14 Optos 11,866 2.0 Medical technology - retinal imaging
15 Regus 11,558 1.9 Serviced office accommodation
16 National Express Group 11,500 1.9 Train, bus & coach operator
17 Brewin Dolphin Holdings 11,351 1.9 Private client fund manager
18 Beazley 11,318 1.9 Lloyds insurer
19 Tullett Prebon 10,703 1.8 Inter dealer broker
20 AZ Electronic Materials 10,521 1.7 Speciality chemicals
Top Twenty Investments 303,988 50.4
21 Yule Catto & Company 10,466 1.7 Speciality chemicals
22 Greggs 10,373 1.7 Retailing - baked products & sandwiches
23 Low & Bonar 10,232 1.7 Manufacture of industrial textiles
24 Howden Joinery Group 9,375 1.6 Kitchen supplier
25 Morgan Crucible Company 9,167 1.5 Engineering - ceramic & carbon materials
26 Moneysupermarket.com Group 9,107 1.5 Price comparison websites
27 Castings 8,776 1.5 Engineering - automotive castings
28 Vectura Group 8,639 1.5 Inhaled pharmaceuticals - respiratory specialism
29 KCOM Group 8,606 1.4 Telecommunications services
30 Lavendon Group 8,451 1.4 Hire of access equipment
Top Thirty Investments 397,180 65.9
Other Investments 272,723 45.2
Total Investments 669,903 111.1
Net Liabilities (66,812) (11.1)
Total Net Assets 603,091 100.0
The Income Statement, Balance Sheet, Reconciliation of Movements in
Shareholders' Funds and summary Cash Flow Statement are set out below:-
INCOME STATEMENT
For the year ended 31 December 2011
(audited)
For the year ended For the year ended
31 December 2011 31 December 2010
Revenue Capital Total Revenue Capital Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000
(Losses)/gains on - (110,015) (110,015) - 140,996 140,996
investments
Investment income 26,502 - 26,502 20,533 - 20,533
Other income 1 - 1 43 - 43
Investment management (2,105) (3,508) (5,613) (1,803) (3,005) (4,808)
fee
Other expenses (522) (2,475) (2,997) (455) (3,159) (3,614)
-------- -------- -------- -------- -------- --------
Return on ordinary 23,876 (115,998) (92,122) 18,318 134,832 153,150
activities before finance
costs and tax
Finance costs (616) (1,027) (1,643) (796) (1,327) (2,123)
-------- -------- -------- -------- -------- --------
Return on ordinary 23,260 (117,025) (93,765) 17,522 133,505 151,027
activities before tax
Tax on ordinary activities (13) - (13) (10) - (10)
-------- -------- -------- -------- -------- --------
Return attributable to
equity shareholders 23,247 (117,025) (93,778) 17,512 133,505 151,017
======= ======= ======= ====== ======= =======
Returns per Ordinary 24.13p (121.46p) (97.33p) 18.11p 138.08p 156.19p
Share
The Board declared on 25 January 2012 a second interim dividend of 14.3p per
Ordinary Share (2010 - 13.0p). The Board also declared on 20 July 2011 a first
interim dividend of 6.45p per Ordinary Share (2010 interim dividend of 6.0p).
The total column of this statement is the profit and loss account of the
Company. All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued in the
period. A Statement of Total Recognised Gains and Losses is not required as all
gains and losses of the Company have been reflected in the above statement.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
For the year ended 31 December 2011
(audited)
Capital
Share redemption Special Capital Revenue
Capital reserve reserve reserve reserve Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Balance as at 31 December 2010 964 24 183,279 496,301 36,221 716,789
Return on ordinary - - - (117,025) 23,247 (93,778)
activities after taxation
Equity dividends paid - - - - (18,744) (18,744)
Purchase of Ordinary Shares (3) 3 (1,176) - - (1,176)
-------- -------- -------- -------- -------- --------
Balance as at 31 December 2011 961 27 182,103 379,276 40,724 603,091
======= ======= ======= ======= ======= =======
For the year ended 31 December 2010
(audited)
Capital
Share redemption Special Capital Revenue
Capital reserve reserve reserve reserve Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Balance as at 31 December 2009 969 19 186,025 362,796 37,113 586,922
Return on ordinary - - - 133,505 17,512 151,017
activities after taxation
Equity dividends paid - - - - (18,404) (18,404)
Purchase of Ordinary Shares (5) 5 (2,746) - - (2,746)
-------- -------- -------- -------- -------- --------
Balance as at 31 December 2010 964 24 183,279 496,301 36,221 716,789
======= ======= ======= ======= ======= =======
BALANCE SHEET
As at 31 December 2011
(audited)
31 December 31 December
2011 2010
£ 000 £ 000
Fixed assets:
Investments at fair value through 669,903 768,954
profit or loss
-------- --------
Current assets
Debtors 2,578 1,620
Cash at bank 151 68
-------- --------
2,729 1,688
Creditors (amounts falling due within (1,657) (53,853)
one year)
-------- --------
Net current (liabilities)/assets 1,072 (52,165)
-------- --------
Total Assets less Current Liabilities 670,975 716,789
Creditors (amounts falling due after (67,884) -
more than one year)
-------- --------
Total Net Assets 603,091 716,789
======= =======
Capital and reserves: equity interests
Called up share capital (Ordinary Shares) 961 964
Reserves:
Capital redemption reserve 27 24
Special reserve 182,103 183,279
Capital reserve 379,276 496,301
Revenue reserve 40,724 36,221
-------- --------
Total Shareholders' Funds 603,091 716,789
======= =======
Net Asset Value per Ordinary Share 627.31p 743.81p
SUMMARY CASH FLOW STATEMENT
For the year ended 31 December 2011
(audited)
For the year ended For the year ended
31 December 2011 31 December 2010
£ 000 £ 000 £ 000 £ 000
Net cash inflow from operating activities 18,763 15,766
Taxation (15) (35)
Returns on investments and (1,584) (1,739)
servicing of finance
Capital expenditure and
financial investment:
Payments to acquire investments (238,064) (248,066)
Receipts from sales of investments 224,277 251,430
-------- --------
Net cash (outflow)/inflow from
capital expenditure and financial (13,787) 3,364
investment
-------- --------
3,377 17,356
Equity dividends paid (18,744) (18,404)
-------- --------
(15,367) (1,048)
Financing
Purchase of Ordinary Shares (800) (2,746)
Net drawdown of bank debt 16,250 3,500
facilities (before costs)
-------- --------
Increase/(decrease) in cash 83 (294)
======== ========
Reconciliation of net cash flow to
movement in net debt
Increase/(decrease) in cash in the year 83 (294)
Net drawdown of bank debt facilities (16,100) (3,500)
Amortised costs in respect of (173) (423)
the bank debt facility
-------- --------
Change in net debt (16,190) (4,217)
Opening net debt (51,543) (47,326)
-------- --------
Closing net debt (67,733) (51,543)
======== =======
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING STANDARDS
The financial statements have been prepared on a going concern basis and in
accordance with applicable accounting standards and the AIC's Statement of
Recommended Practice "Financial Statements of Investment Trust Companies and
Venture Capital Trusts" issued in 2009.
The same accounting policies used for the year ended 31 December 2010 have been
applied.
2. INVESTMENT MANAGEMENT FEE
For the year to 31 December 2011 Revenue Capital Total
£ 000 £ 000 £ 000
Investment management fee 2,105 3,508 5,613
====== ====== ======
For the year to 31 December 2010 Revenue Capital Total
£ 000 £ 000 £ 000
Investment management fee 1,803 3,005 4,808
====== ====== ======
3.DIVIDENDS
Year to Year to
31 December 2011 31 December 2010
£000 £000
Amounts recognised as distributions to
equity holders in the period:
Second interim dividend of 13.0p for the 12,528 12,592
year ended 31 December 2010 (2009: 13.0p)
First interim dividend of 6.45p for 6,216 5,812
the year ended 31 December 2011 (2010: 6.0p)
------- -------
18,744 18,404
====== ======
The second interim dividend for the year ended 31 December 2011 of 14.3p will
be paid on 24 February 2011. This dividend has not been included as a liability
in these financial statements.
4. RETURNS PER ORDINARY SHARE
The returns per Ordinary Share are based on:
Year to Year to
31 December 2011 31 December 2010
£000 £000
Returns attributable to Ordinary (93,778) 151,017
Shareholders
Weighted average number of shares in
issue during the period 96,345,381 96,685,671
5. NET ASSET VALUES
The net assets and the net asset value per share attributable to the Ordinary
Shares at each period end are calculated in accordance with their entitlements
in the Articles of Association and were as follows:
31 December 31 December
2011 2010
£000 £000
Net assets attributable 603,091 716,789
Pence Pence
Net asset value attributable per Ordinary
Share 627.31 743.81
As at 31 December 2010, the Company had 96,138,792 Ordinary Shares in issue (31
December 2010 - 96,366,792). During the year to 31 December 2011, the Company
bought in and cancelled 228,000 shares (2010 - 500,208 shares) at a total cost
of £ 1,176,000 (2010 - £2,746,000).
6. FURTHER INFORMATION
The foregoing do not constitute statutory accounts (as defined in section 434
(3) of the Companies Act 2006) of the Company. The statutory accounts for the
year ended 31 December 2010, which contained an unqualified Report of the
Auditors, have been lodged with the Registrar of Companies and did not contain
a statement required under section 498(2) or (3) of the Companies Act 2006.
Certain statements in this announcement are forward looking statements. By
their nature, forward looking statements involve a number of risks,
uncertainties or assumptions that could cause actual results or events to
differ materially from those expressed or implied by those statements. Forward
looking statements regarding past trends or activities should not be taken as
representation that such trends or activities will continue in the future.
Accordingly, undue reliance should not be placed on forward looking statements.
The Annual Report is expected to be posted to shareholders on 30 January 2012.
Members of the public may obtain copies from Aberforth Partners LLP, 14
Melville Street, Edinburgh EH3 7NS or from its website at www.aberforth.co.uk.
CONTACT: David Ross/Alistair Whyte, Aberforth Partners LLP, 0131 220 0733
Aberforth Partners LLP, Secretaries - 25 January 2012
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