Annual Financial Report
Aberforth Smaller Companies Trust plc
Audited Final Results for the year to 31 December 2012
The following is an extract from the Company's Annual Report and Accounts for
the year to 31 December 2012. The Annual Report is expected to be posted to
shareholders on 2 February 2013. 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 National Storage Mechanism at: www.morningstar.co.uk/uk/NSM
facility.
FEATURES
Net Asset Value Total Return +31.9%
Benchmark Index Total Return +29.9%
Ordinary Share Price Total Return +43.9%
Second Interim Dividend increased by 6.6% to 15.25p per Ordinary 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
Numis Smaller Companies Index (excluding Investment Companies) over the long
term. ASCoT is managed by Aberforth Partners LLP.
CHAIRMAN'S STATEMENT TO SHAREHOLDERS
Review of 2012 Performance
The history books will record 2012 as an excellent year for UK smaller
companies. Larger companies, as represented by the FTSE 100, gave a total
return (including reinvested dividends) of 10.0%, while the FTSE All-Share,
which is also heavily weighted towards large companies, gave a return of
12.3%. Meanwhile, the Numis Smaller Companies Index (excluding Investment
Companies) (NSCI (XIC)), your Company's benchmark, gave a return of 29.9%.
Over the same period, your Company's net asset value total return was 31.9%,
while the share price return (including reinvested dividends) was 43.9%.
Returns of this magnitude require a health warning. They are unlikely to be
matched in 2013.
Importantly for your Company, the year witnessed a stirring in the fortunes of
value investing within the NSCI (XIC), your Company's investment universe.
Over the five calendar years from 2007-11 inclusive, value stocks within the
NSCI (XIC) underperformed growth stocks by 9.4% p.a.. In 2012, there was a
reversal of this trend. The year also saw exceptionally strong relative
performance from the FTSE SmallCap Index, which beat the FTSE 250 Index for
only the second year out of the last nine. This, too, is important since your
Company's portfolio is positioned towards the lower end of the capitalisation
range. The Managers' report expands in more detail on these themes and the
interconnected influences of style and size.
While 2012 witnessed a "rebranding" of your Company's investment benchmark
which is now known as the Numis Smaller Companies Index (excluding Investment
Companies), Shareholders should be aware the underlying data series and index
methodology remains unaltered. Since your Company's formation in 1990, the
NSCI (XIC) has risen by 10.8% p.a. By comparison, your Company's net asset
value total return has increased by 13.3% p.a..
Dividends
In 2012, the dividend experience from investee companies in general, continued
to be positive. Your Company's investment objective is total return orientated
rather than income orientated. However, as value investors, your Board and the
Managers are acutely aware of the importance of the role that income plays in
generating long term returns for both UK equities in general and your Company
specifically. In this context, your Board is pleased to declare a second
interim dividend, in lieu of a final dividend, of 15.25p. This results in
total dividends for the year of 22.25p, representing an increase of 7.2% on
2011. Based on the year end share price of 695.5p, your Company's shares
deliver a 3.2% yield.
Your Board remains committed to a progressive dividend policy. The level of
your Company's revenue reserves, after adjusting for payment of the second
interim dividend, amounting to 32.1p per share (up from 28.1p as at 31
December 2011), provides a degree of flexibility going forward.
The second interim dividend will be paid on 28 February 2013 to Shareholders
on the register as at the close of business on 8 February 2013. The ex
dividend date is 6 February 2013. Your Company operates a Dividend
Reinvestment Plan (DRIP). Details of the DRIP, including the Form of Election,
are available from Aberforth Partners LLP or on its website,
www.aberforth.co.uk.
Gearing
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 2012, gearing was 5.9%, with £47m of the £100m facility
utilised. The decision to remain geared is based upon attractive valuation
levels, described in greater detail in the Managers' Report. As has been
highlighted in recent Annual Reports, this should also be viewed in
conjunction with the strong balance sheets of the underlying investee
companies currently held in your portfolio. During the year, the level of
gearing ranged from 5.8% to 11.2%.
Share Buy-In Authority and Treasury Shares
At the Annual General Meeting in March 2012, the authority to buy-in up to
14.99% of your Company's Ordinary Shares was approved. During the year,
446,000 Ordinary Shares were bought-in at a total cost of £2.6 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 2013.
Your Board keeps under constant review the circumstances under which the
authority is utilised in relation to the overall objective of seeking to
manage the share price discount relative to the net asset value.
Board Changes
Hamish Buchan, who has been a Director since November 2003, will not be
standing for re-election at the forthcoming Annual General Meeting. Hamish has
been a valued member of your Board and we will all miss his insight and
invaluable contributions. We wish Hamish all the very best for the future.
We are delighted to appoint Paul Trickett as a Director of your Company with
effect from 30 January 2013. Paul's career in the financial industry extends
over 25 years. He has extensive knowledge of the investment world and we look
forward to working with him.
Regulatory Developments
The regulatory environment in which your Company operates continues to change.
The Retail Distribution Review (RDR) came into effect on 1 January 2013 with
several commentators forecasting an increased level of interest in investment
trusts from the investor adviser community. Later in 2013, and subject to
consultation, we will see The Alternative Investment Fund Managers (AIFM)
Directive come into force. Your Board and the Managers continue to monitor all
major regulatory developments and their impact on your Company.
Summary
Performance within the NSCI (XIC) over the recent past has been highly
polarised, with larger growth stocks driving the index's returns. This has
been detrimental to the relative performance of your Company, given its value
investment orientation and its size positioning towards the lower end of the
available range of market capitalisations. It is therefore encouraging that
2012 saw a shift in these recent trends in favour of both style and size.
However, since the global financial crisis in 2008, we have witnessed such
periods before, only for them to fade and for larger growth leadership to
resume: it would therefore be unwise to proclaim the "return of value
investing" based solely upon the trends of any one calendar year.
Regardless of what 2013 brings, your Board remains confident in ASCoT's style
positioning, which has become increasingly uncommon within the small cap
market over recent years. Stockmarket history supports the eventual revival in
fortunes of both value investing and the small companies effect. These have
been the two cornerstones of your Company's strategy since its creation in
1990 and have no doubt been crucial in attracting investors to become
shareholders in ASCoT. Therefore, your Board takes comfort from the Managers'
unswerving application of their value investment philosophy and is also
encouraged by the alignment of interests represented by their significant
shareholdings in your Company.
Finally, your Board and I very much welcome your views and are always
available to talk to Shareholders directly. My email address is noted below.
Professor Paul Marsh
Chairman
29 January 2013
paul.marsh@aberforth.co.uk
MANAGERS' REPORT
Introduction
Stockmarkets performed well in 2012. The FTSE All-Share's total return was
12.3%, but this was eclipsed by the NSCI (XIC)'s 29.9%. Small companies
therefore regained the ground lost in 2011 and, indeed, proceeded to move
above the previous highs established in 2007. Illustrating the importance of
income to equity returns, the NSCI (XIC) ended the year 19% above its mid 2007
peak in total return terms but only 1% above that peak in capital only terms.
ASCoT performed relatively well in 2012. Its NAV total return of 31.9% is
analysed in detail in the Investment Performance section of this report.
These strong returns from equities are apparently at odds with macro economic
developments through the
year: the US had to deal with the "fiscal cliff", Chinese GDP decelerated from
double digit growth rates, the Eurozone crisis rumbled on to drag much of the
Continent into recession, and in the UK the austerity
strategy combined with weaker overseas demand to provoke a double-dip
recession. Offsetting these
challenges was an encouraging performance from the US economy, where there are
indications, not least
from the housing market, that the consumer sector might be able to resume its
traditional role of supporting global demand. Moreover, while the Eurozone's
problems are still very obvious, markets have been tempted to the view that
some of the key elements of a lasting solution may be starting to fall into
place and that things may have stopped getting worse.
Pervading these positive and negative influences on real economies are
unprecedented monetary conditions. While it is still too early to be
definitive about the merits or otherwise of "quantitative easing" in the US
and UK or the Eurozone's new "outright monetary transactions", the past year
witnessed rising frustration with such unconventional measures. These appear
frequently to have missed their intended target, which is presumably
investment in the real economy, instead providing a boost to asset prices.
Thus, the "risk-on, risk-off" gyrations of the equity markets in recent years
can be rationalised as coinciding with the announcement of the latest
liquidity boost.
But, the distortions of government action, whether through central banks'
quantitative easing or through regulation of the type applied to the valuation
of defined pension liabilities, are not confined to volatile assets such as
equities. Government bonds, which have not endured the curse of volatility in
recent years, are in uncharted territory. Their yields, the cornerstone of
financial asset valuation, have been driven down to historically low levels.
Within the discount rates used to value apparently riskier assets, the
so-called risk free component is close to zero. This leaves the more
subjective component, the asset specific risk premium, much more important. In
such an environment, the valuations of financial assets can readily become
detached from reality. The beneficiaries within equity markets are those
businesses that are perceived capable of growing irrespective of economic
conditions and of avoiding the disappointment of expectations - that is to
say, those businesses that, like bonds themselves, have experienced low
volatility in recent years. Within the context of the NSCI (XIC), such
companies are relatively few and have enjoyed very strong share price
performances over recent years, resulting in stretched valuations relative to
the majority.
This "valuation stretch", which is quantified later in this report, perhaps
hints at the most convincing reason for the strong performance from small UK
quoted companies and, indeed, other equities during 2012: accentuated by the
stockmarket declines in 2011, the valuations of the majority of companies were
simply much too low. While markets, under the influence of government action,
might be slower than usual to exploit valuation anomalies, they do get there
in the end.
Investment performance
ASCoT's NAV total return in 2012 was 31.9%. Against a background of a strong
market for the shares of
small UK quoted companies, with the NSCI (XIC) returning 29.9%, ASCoT's
gearing was beneficial. Average gearing of 7.5% enhanced portfolio returns as
the following table demonstrates.
Performance background
For the twelve months ended 31 December 2012 Basis points
Stock selection -422
Sector selection +477
----
Attributable to the portfolio of investments, based on mid prices +55
(after transaction costs of 34 basis points)
Movement in mid to bid price spread -31
Cash/gearing +260
Purchase of ordinary shares +9
Management fee -91
Other expenses -7
----
Total attribution based on bid prices +195
Note: 100 basis points = 1%. Total Attribution is the difference between the total
return of the NAV and the Benchmark Index (i.e. NAV = 31.89%; Benchmark Index =
29.94%; difference is +1.95% being +195 basis points).
The standard methodology to split attribution between Stock and Sector
selection can be misleading when analysing ASCoT's performance. Your Managers'
investment process is focused on decisions about individual companies. Only
rarely does a general view on a particular sector play a part in determining
the profile of the portfolio. The TMT period, when ASCoT had very little
representation in "new economy" businesses, was a notable instance of a sector
level influence, but even then the key insights were the nonsensical
valuations attributed to individual companies within the TMT areas of the
market. In 2012, some investment was made in the resources companies, but the
portfolio benefited overall from its under-weight position in the resources
sectors, which accounted for roughly 60% of the positive sector attribution.
The following paragraphs describe some of the themes inherent in the portfolio
and their influences on performance.
Style
The opening section of this report described how the unusual conditions
pervading financial markets since the global financial crisis have manifested
themselves in the universe of small UK quoted companies. The bear market for
value stocks in recent years has been the deepest and most prolonged in the 57
year history of the NSCI (XIC). Given your Managers' consistently applied
value investment disciplines, this has represented a significant headwind to
ASCoT's relative performance. Encouragingly, the past twelve months witnessed
a stirring in value. There are several methods to assess the performance of
value against growth, all of which have advantage and disadvantages. Data from
Style Research (an independent performance analysis firm) shows value stocks
out-performing growth in 2012. This suggests that style influences were
beneficial to ASCoT's returns last year.
Size
The NSCI (XIC) is defined as the bottom 10% by value of the UK stockmarket.
This definition drives a market capitalisation ceiling of £1.4bn and so the
index includes a large number of mid cap companies. Indeed, the overlap with
FTSE 250 accounts for 76% of the value of the NSCI (XIC). The profile of
ASCoT's portfolio is rather different, with 56% invested in mid caps. This
positioning is motivated by the more attractive valuations on offer among the
smaller denizens of the NSCI (XIC): the craving for certainty that has
characterised financial markets in recent years has driven many investors to
overlook the less liquid "smaller small" companies. With its closed-end
status, ASCoT is well placed to exploit the consequent discount for
illiquidity. This discount is unusually large at present and does not
accurately reflect the business fundamentals of many "smaller small"
companies. This has presented the opportunity to your Managers to invest in
companies that ought to be attractive from the perspective of both the value
and the growth investor.
Turnover
With the NSCI (XIC) led higher by growth companies over recent years, the
majority of businesses have been neglected. Re-ratings among this majority
have been infrequent. Thus the opportunities to take money out of investments
that have enjoyed a revaluation and to put it back to work in more modestly
rated investments have also been infrequent. This is manifest in ASCoT's
portfolio turnover, which, at 26% in 2012, was lower than the 22 year average
of 38%. Since the basic dynamic of recycling capital makes an important
contribution to the performance of many value investors, your Managers, though
conscious of the frictional dealing costs, would not be uncomfortable were
turnover to return to more normal levels in the years ahead.
Strong balance sheets
Balance sheets remain unusually strong across the corporate sectors of major
economies. This is also a feature of the NSCI (XIC)'s constituents and of
ASCoT's investments: companies forecast to have net cash on their balance
sheets at the end of 2013 accounted for 38% and 36% by value of the year end
portfolio and index respectively. ASCoT's exposure declined through 2012 as a
result of portfolio changes and, encouragingly, of a handful of holdings
coming up with a use for the cash. However, hoarding remains the general
theme. Your Managers acknowledge the still uncertain trading environment but
would prefer ASCoT's investee companies to utilise their financial strength on
organic investment or modestly priced acquisitions. In the absence of these,
mounting cash piles are of little help to anyone and represent an opportunity
cost to investors.
De-equitisation
Last year was another of net de-equitisation within the small cap universe,
with new issuance out-weighed by returns of capital, dividends and
acquisitions. The first half of 2012 witnessed an upturn in the level of M&A
activity in the small cap world. The most encouraging aspect was the large
(50-60%) premiums to market prices that acquirers were able to justify, though
it is worth stating that traditional premiums of around 30% would have been
unattractive in view of the low valuations accorded to many businesses by the
stockmarket. However, after the half year, the level of M&A fell sharply,
possibly in response to macro economic uncertainty. Over the year as a whole,
18 constituents of the NSCI (XIC) were acquired. ASCoT owned five of these.
This represented a lower than average hit-rate, though the portfolio enjoyed
an indirect benefit as the large premiums paid in the first half drew wider
attention to the valuations on offer. Meanwhile, there was little IPO activity
within the investment universe, with only five primary listings. The principal
influence here is again the low valuations already on offer in the secondary
market. These are often too low to attract private equity houses, which
instead trade businesses between each other. But if vendors do not move their
valuation expectations the chances of a sustained uptick in IPOs are not high.
Dividends
The worst year for small company dividends since records for the NSCI (XIC)
began in 1955 was 2009. Since then, the recovery has been strong. Entering
2012, the third year of recovery, your Managers were cautiously expecting a
slowdown in the rate of aggregate dividend growth from the NSCI (XIC)'s
constituents. In the event, the dividend experience proved better than
expected, helped by the contribution of companies that had passed their
dividends in 2009 returning to the dividend register. ASCoT's portfolio has
shared in this favourable backdrop. The following table classifies ASCoT's 90
holdings at 31 December by their most recent dividend action.
Band Nil Down Flat UP New
No. of holdings 19 5 16 46 4
Supported by long term data, which show that dividend yield and dividend
growth have accounted for over three quarters of the total real return from
small companies, your Managers believe that income will continue to be crucial
to future returns from the asset class and, indeed, from equities in general.
However, in today's income starved world, it can be frustrating when the
search for yield within the UK equity market tends to begin and end with the
FTSE 100.
The 2.8% yield of small companies is below the 3.6% of the FTSE All-Share, but
this is in part a result of the relatively large proportion of the NSCI (XIC)
that still does not pay dividends: the yield of the yielders is 3.4%. The
small company universe also comprises many more stocks than the large cap
world and income is considerably less concentrated, a point highlighted by
BP's problems two years ago. Within the NSCI (XIC) there are numerous
businesses on attractive yields that have good dividend records and whose
boards appreciate the importance of income to investors. Such businesses are a
feature of ASCoT's portfolio and help drive a yield premium over the NSCI
(XIC). ASCoT's portfolio dividend cover of 3.1x is also noteworthy: this is
towards its highest ever level and ought to be supportive of dividend growth
in future years.
Valuations
Characteristics 31 December 2012 31 December 2011
ASCoT Benchmark ASCoT Benchmark
Number of companies 90 389 89 422
Weighted average market £512m £748m £391m £676m
capitalisation
Price earnings ratio 10.5x 12.8x 9.0x 10.5x
(historic)
Dividend yield (historic) 3.0% 2.8% 3.4% 3.2%
Dividend cover 3.1x 2.8x 3.3x 3.0x
The table above provides the historic PE ratios and dividend yields of the
portfolio and the NSCI (XIC). Both metrics emphasise the portfolio's value
characteristics. The table also illustrates the portfolio's size positioning:
ASCoT's weighted average market capitalisation is much lower than that of the
index. This is again a result of your Managers' value investment disciplines:
the smaller companies within the NSCI (XIC) are presently valued more cheaply
than the larger companies.
When assessing the value of individual businesses, in relation to their own
histories, to other companies or to M&A valuations, your Managers tend to
focus on the ratio of enterprise value to earnings before interest, tax and
amortisation (EV/EBITA). This is because the PE ratio of a company is
influenced 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.
2013 EV/EBITA ratio
36 growth companies 247 other Tracked NSCI(XIC) ASCoT's portfolio
companies
13.5x 8.6x 9.4x 7.4x
The table above sets out the EV/EBITA ratios of ASCoT's portfolio, the NSCI
(XIC) and two components of the index to which the opening section of this
report alluded. Your Managers monitor a collection of growth stocks within the
NSCI (XIC). These totalled 36 in December, though 31 have been constituents of
the NSCI (XIC) over the last three years. At 1 January 2010, the 31
represented just 7% by number of the NSCI (XIC). However, they accounted for
13% of the then value of the index and for 28% of its 52% total return over
the three years to 31 December 2012. The re-rating over the period took their
average EV/EBITA ratio up to 13.5x. Meanwhile, the substantial majority of the
NSCI (XIC), which can be considered to comprise value stocks, enjoyed more
modest but still strong returns. The average EV/EBITA multiple of these
companies ended 2012 at 8.6x, implying a 57% premium for growth and perceived
certainty. TMT aside, this is the widest "value stretch" that your Managers
have witnessed over ASCoT's 22 years. The disparity is stark and gives your
Managers confidence that ASCoT's portfolio is well positioned to generate good
relative returns in the future.
Outlook & conclusion
The trouble with value investors is that they can almost always present a set
of numbers that demonstrates how much cheaper their portfolio is than the
market. However, with a long term horizon, this is probably enough. Academic
studies on both sides of the Atlantic suggest that the value style
out-performs over time, through the process of steady compounding in companies
that the market chooses not to re-rate and through the disciplined recycling
of funds from companies that have been revalued into those on lower
valuations.
In last year's report, conscious of shorter time horizons of some investors,
your Managers described four potential catalysts for a renaissance of the
value style. A year on, it is reasonable to conclude that each of these may
have played a part in 2012's stirring in value.
- Dividends have continued to grow and the hunger for yield may slowly be
rubbing off on small companies.
- Your Managers have continued to conduct discreet corporate engagement in an
attempt to close value gaps.
- De-equitisation has continued, with a slightly disappointing number of M&A
transactions offset by higher than average premiums.
- An improved macro economy is perhaps most difficult to argue, though,
without further unpleasant surprises, equity prices had possibly discounted
much of the downside as 2011 drew to a close.
A year on, despite the asset class's intervening 29.9% returns, your Managers
remain enthused about the prospects for value investment in the equities of
small UK quoted companies. This enthusiasm is motivated by what are still
attractive valuations. And these valuations are attractive because, for
several years now, the market has run scared of practically everything that
ASCoT has to offer: the low volatility of bonds has been preferred to
equities; the perceived certainty of the growth style has been preferred to
value; more liquid "larger small" companies have been preferred to "smaller
small" companies; private equity models have been preferred to quoted
companies; and exciting emerging markets have been preferred to the UK.
From a contrarian perspective and backed up by historical evidence, your
Managers consider ASCoT's portfolio of well financed and attractively valued
businesses suitably positioned to take advantage of today's unusual structure
of relationships within financial markets and to deliver good returns for
investors over the medium and long term.
Aberforth Partners LLP
Managers
29 January 2013
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 Marsh
Chairman
29 January 2013
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 2012 was 0.5% (2011: 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 £46,750,000 was
drawn down as at 31 December 2012 (2011: debt facility of £100,000,000, of
which £68,000,000 was drawn down).
(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 2012, all of the Company's financial instruments (excluding
loans) were included in the balance sheet at fair 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:
- 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 receives detailed portfolio attribution analysis. The peer group is
also regularly monitored by the Board and this includes NAV performance and
share price discount, management fees and ongoing charges.
- 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.
- 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 considers the gearing strategy and
associated risk at each meeting.
- Reputational risk - reputational risk can rise as a result of factors within
or outwith the Company's control. The Board and the Managers monitor external
forces affecting the reputation of the Company and take action if appropriate.
The Board and the Secretaries also monitor market developments and identify
and communicate regularly with investors.
- Risk appetite - the effect of inappropriate risk appetite or failure to
establish appropriate strategy to manage the Company to a desired risk level.
The Managers have a clearly defined investment philosophy which includes a
number of risk metrics, and they manage a diversified portfolio. The Board
considers the strategy to be adopted in conjunction with the risk measures and
reviews the decisions against this strategy. The Board continually monitors
the Company's performance against the benchmark, and regularly receive a
detailed portfolio attribution analysis, including risk measures.
- 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.
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.
Thirty Largest Investments
As at 31 December 2012
Value % of Total
No. Company £'000 Net Assets Business Activity
1 RPC Group 24,734 3.2 Plastic packaging
2 Bodycote 24,167 3.2 Engineering - heat treatment
3 Galliford Try 22,525 2.9 Housebuilding & construction services
4 e2v technologies 21,637 2.8 Electronic components & subsystems
5 CSR 20,891 2.7 Location & connectivity semiconductors
6 JD Sports Fashion 20,588 2.7 Retailing - sports goods & clothing
7 Northgate 19,805 2.6 Van rental
8 Spirit Pub Company 19,749 2.6 Managed pub operator
9 St. Modwen Properties 18,495 2.4 Property investment & development
10 Howden Joinery Group 16,540 2.2 Kitchen supplier
Top Ten Investments 209,131 27.3
11 Brewin Dolphin Holdings 16,477 2.2 Private client fund manager
12 RPS Group 16,380 2.1 Energy & environmental consulting
13 Barratt Developments 15,547 2.0 Housebuilding
14 Phoenix IT Group 14,564 1.9 IT services & disaster recovery
15 Vectura Group 13,906 1.8 Inhaled pharmaceuticals - respiratory specialism
16 Tullett Prebon 13,802 1.8 Interdealer broker
17 Lavendon Group 13,593 1.8 Hire of access equipment
18 Synthomer 13,266 1.7 Speciality chemicals
19 Micro Focus 13,027 1.7 Software - development & testing
20 Regus 12,586 1.7 Serviced office accommodation
Top Twenty Investments 352,279 46.0
21 AZ Electronic Materials 12,355 1.6 Chemicals for semiconductor production
22 WH Smith 11,800 1.5 Newsagents
23 Unite Group 11,797 1.5 Property - student accommodation
24 National Express Group 11,644 1.5 Train, bus & coach operator
25 Halfords Group 11,638 1.5 Retailing & car servicing
26 Beazley 11,369 1.5 Lloyds insurer
27 Laird Group 11,170 1.5 Electronic systems & controls
28 Cranswick 10,904 1.4 Food manufacturer
29 Castings 10,861 1.4 Engineering - automotive castings
30 Optos 10,665 1.4 Medical technology - retinal imaging
Top Thirty Investments 466,482 60.8
Other Investments 346,844 45.1
Total Investments 813,326 105.9
Net Liabilities (45,147) (5.9)
Total Net Assets 768,179 100.0
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 2012
(audited)
For the year ended For the year ended
31 December 2012 31 December 2011
Revenue Capital Total Revenue Capital Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Gains/(losses) on investments - 169,537 169,537 - (110,015) (110,015)
Investment income 28,065 - 28,065 26,502 - 26,502
Other income 1 - 1 1 - 1
Investment management fee ( 2,057) (3,428) (5,485) (2,105) (3,508) (5,613)
Other expenses (443) (2,035) (2,478) (522) (2,475) (2,997)
------- ------- ------- ------- ------- -------
Return on ordinary activities 25,566 164,074 189,640 23,876 (115,998) (92,122)
before finance costs and tax
Finance costs (540) (899) (1,439) (616) (1,027) (1,643)
------- ------- ------- ------- ------- -------
Return on ordinary activities 25,026 163,175 188,201 23,260 (117,025) (93,765)
before tax
Tax on ordinary activities (18) - (18) (13) - (13)
------- ------- ------- ------- ------- -------
Return attributable to
equity shareholders 25,008 163,175 188,183 23,247 (117,025) (93,778)
====== ======= ======= ====== ======= =======
Returns per Ordinary Share 26.07p 170.13p 196.20p 24.13p (121.46p) (97.33p)
The Board declared on 29 January 2013 a second interim dividend of 15.25p per
Ordinary Share (2011 - 14.3p). The Board also declared on 18 July 2012 a first
interim dividend of 7.00p per Ordinary Share (2011 interim dividend of 6.45p).
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 2012
(audited)
Capital
Share redemption Special Capital Revenue
Capital reserve reserve reserve reserve Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Balance as at 31 December 2011 961 27 182,103 379,276 40,724 603,091
Return on ordinary activities after taxation - - - 163,175 25,008 188,183
Equity dividends paid - - - - (20,453) (20,453)
Purchase of Ordinary Shares (4) 4 (2,642) - - (2,642)
------ ------ ------ ------ ------ ------
Balance as at 31 December 2012 957 31 179,461 542,451 45,279 768,179
====== ====== ====== ====== ====== ======
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 activities after taxation - - - (117,025) 23,247 (93,778)
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
====== ====== ====== ====== ====== ======
BALANCE SHEET
As at 31 December 2012
(audited)
31 December 31 December
2012 2011
£ 000 £ 000
Fixed assets:
Investments at fair value through profit or loss 813,326 669,903
------- -------
Current assets
Debtors 1,857 2,578
Cash at bank 259 151
------- -------
2,116 2,729
Creditors (amounts falling due within one year) (577) (1,657)
------- -------
Net current assets 1,539 1,072
------- -------
Total Assets less Current Liabilities 814,865 670,975
Creditors (amounts falling due after more than one year) (46,686) (67,884)
------- -------
Total Net Assets 768,179 603,091
======= =======
Capital and reserves: equity interests
Called up share capital (Ordinary Shares) 957 961
Reserves:
Capital redemption reserve 31 27
Special reserve 179,461 182,103
Capital reserve 542,451 379,276
Revenue reserve 45,279 40,724
------- -------
Total Shareholders' Funds 768,179 603,091
======= =======
Net Asset Value per Ordinary Share 802.76p 627.31p
SUMMARY CASH FLOW STATEMENT
For the year ended 31 December 2012
(audited)
For the year ended For the year ended
31 December 2012 31 December 2011
£ 000 £ 000 £ 000 £ 000
Net cash inflow from operating activities 22,708 18,763
Taxation 9 (15)
Returns on investments and servicing of finance (1,394) (1,584)
Capital expenditure and financial investment
Payments to acquire investments (200,491) (238,064)
Receipts from sales of investments 223,997 224,277
-------- --------
Net cash inflow/(outflow) from capital
expenditure and financial investment 23,506 (13,787)
-------- --------
44,829 3,377
Equity dividends paid (20,453) (18,744)
-------- --------
24,376 (15,367)
Financing
Purchase of Ordinary Shares (3,018) (800)
Net (repayment)/drawdown of bank debt facilities
(before costs) (21,250) 16,250
-------- --------
Increase in cash 108 83
======= =======
Reconciliation of net cash flow to movement in net debt
Increase in cash in the year 108 83
Net repayment/(drawdown) of bank debt facilities 21,250 (16,100)
Amortised costs in respect of the bank debt facility (52) (173)
-------- --------
Change in net debt 21,306 (16,190)
Opening net debt (67,733) (51,543)
-------- --------
Closing net debt (46,427) (67,733)
======= =======
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 2011 have
been applied.
2. INVESTMENT MANAGEMENT FEE
For the year to 31 December 2012 Revenue Capital Total
£ 000 £ 000 £ 000
Investment management fee 2,057 3,428 5,485
====== ====== ======
For the year to 31 December 2011 Revenue Capital Total
£ 000 £ 000 £ 000
Investment management fee 2,105 3,508 5,613
====== ====== ======
3. DIVIDENDS
Year to Year to
31 December 2012 31 December 2011
£000 £000
Amounts recognised as distributions
to equity holders in the period:
Second interim dividend of 14.3p 13,748 12,528
for the year ended 31 December
2011 (2010: 13.0p)
First interim dividend of 7.0p 6,705 6,216
for the year ended 31 December
2012 (2011: 6.45p)
------ ------
20,453 18,744
====== ======
The second interim dividend for the year ended 31 December 2012 of 15.25p will
be paid on 28 February 2013. 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 2012 31 December 2011
£000 £000
Returns attributable to Ordinary 188,183 (93,778)
Shareholders
Weighted average number of shares in 95,911,500 96,345,381
issue during the period
Return per Ordinary Share 196.20p (97.33p)
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
2012 2011
£000 £000
Net assets attributable 768,179 603,091
Pence Pence
Net asset value attributable 802.76 627.31
per Ordinary Share
As at 31 December 2012, the Company had 95,692,792 Ordinary Shares in issue
(31 December 2011 - 96,138,792). During the year to 31 December 2012, the
Company bought in and cancelled 446,000 shares (2011 - 228,000 shares) at a
total cost of £ 2,642,000 (2011 - £1,176,000). 60,000 shares have been bought
back for cancellation between 31 December 2012 and 29 January 2013 at a total
cost of £435,000.
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 2011, 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 2 February 2013.
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 - 29 January 2013
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